Stablecoins vs crypto: the digital asset face-off

Today, there are cryptos and cryptos. You don’t have to stop at or even consider Bitcoin if you don’t want to. The market offers so many other options that it would be a shame (and some might say even reckless) if you only paid attention to the leading coin and ignored all the rest. And if you’re willing to dig a little deeper into the possibilities, you’ll come to learn that there are certain types of cryptocurrencies, like stablecoins, that come with distinct characteristics and perks.

But once you realize that not all digital currencies are the same and become aware of the advantages that stablecoins offer, you’ll inevitably run into a dilemma. You’ll start wondering whether you should learn how to buy USDC or other popular stablecoins instead of Bitcoin or your run-of-the-mill cryptocurrencies.

While the decision ultimately lies with you and should be based on your personal goals and needs, it’s certainly helpful to go over the facts before you reach a conclusion.

Inside stablecoins

Most of you probably already know what crypto is, but for those who need a reminder or a quick intro, here’s a short description. Cryptocurrencies are a form of digital money that, instead of being created by one authority, like a nation’s central bank, uses a decentralized digital database made of a large network of computers (nodes) – most commonly blockchain technology – for issuance and governance.

In the beginning, it was only Bitcoin. The pioneer crypto established the blueprint that most of its successors would follow. But at one point, developers realized they could change things up and bring improvements to the initial formula that Bitcoin introduced, and so new crypto categories began to emerge.

Stablecoins represent one of these subclasses, which means they are a type of crypto and share many similarities with all other groups. But they add one extra element to the equation: they are purposefully designed to maintain a stable value, hence their name. That is quite the feat in a market that is known to be very volatile due to the lack of central controls and its speculative potential. So, how do stablecoins manage to remain relatively stable despite their shaky background?

Well, they use a rather simple trick in that they tie their value to that of a more stable asset, usually fiat money, most commonly the US dollar, or real-world commodities like gold or oil. So, their value is backed 1:1 by assets that are kept in an independently managed reserve, and users can send their stablecoins back to the issuer in exchange for underlying reserve assets through a process known as redemption. For that, the reserve needs to be highly liquid and undergo regular audits.

Not all stablecoins use fiat or commodities as collateral, though. Some use other cryptocurrencies, in which case they require over-collateralization because crypto prices can change so fast and drastically that extra value is needed to keep prices from fluctuating.

There is also a separate subcategory called algorithmic stablecoins that resorts to computer programs to control supply and maintain stable prices. When prices go up or down, the algorithm steps in and tries to correct the imbalance by either minting or burning coins.

How stablecoins compare to standard cryptocurrencies

Since stablecoins have a slightly different structure than typical cryptos, this brings about differences across various aspects, starting with the most obvious one, which is price stability. While stablecoins are pegged to external assets to keep volatility in check, cryptos’ value is determined by a number of different forces, including market demand and supply and investors’ sentiment, which can be quite fickle.

For this reason, stablecoins fare better as a medium of exchange, being more suitable for everyday payments and remittances, as the risk of token prices surging or dropping unexpectedly is much lower. The predictable pricing offers peace of mind to companies that want to adopt crypto but also need to protect themselves against fluctuations that could cause them to lose money.

Crypto seems to be a better choice for those who are looking for a store of value or speculative investments that could bring them outsized returns. Their volatility is easier to manage when there’s a longer time horizon to smooth out short-term swings, and it also creates earning opportunities for traders who are not afraid to take risks.

Transaction time is also an area where stablecoins tend to perform better than other cryptos. Many of them are built on advanced blockchain networks like Solana, Polygon, and Tron, known for both their speed and low transaction costs. Once again, this positions them as a good option for business transactions, as well as cross-border payments and remittances.

Another important aspect to look at is the degree of centralization. For regular cryptocurrencies, decentralization stands as one of the biggest selling points, as they bypass central controls, offering a level of transparency and security that most other financial tools can’t even come close to. Stablecoins depend on the organizations that manage the assets they use as collateral, and that makes them highly centralized. If the company that issues them loses credibility or fails to manage reserves properly, they can lose their pegs and collapse, as happened in the past with algorithmic stablecoins. That’s something to keep in mind when assessing potential risks.

Regulation-wise, stablecoins are currently included in crypto-specific legislation such as MiCA (EU) and the GENIUS Act (US), which offer greater protection for holders and help with inclusion in traditional finance structures. However, it also raises concerns regarding potential restrictions that can complicate things for users.

Comparing stablecoins with other digital currencies is not about trying to figure out which one is better because there are pros and cons to all categories. The point is to highlight the differences, so you can make an informed decision, should you ever find yourself wondering which option would make more sense for you.