Stablecoins Explained: USDT, USDC and Where the Risk Hides

Stablecoins are cryptocurrencies designed to keep a steady value, usually one US dollar per coin. Traders use them to move money between exchanges, to park funds without leaving crypto, and to avoid price swings. They are useful, but "stable" does not mean "risk-free".

How stablecoins keep their value

• Fiat-backed coins, such as USDT and USDC, are supported by reserves like cash and short-term government bonds held by the issuer. You can usually redeem them for dollars through the issuer.
• Crypto-backed coins are secured by other cryptocurrencies locked in smart contracts, usually with more value locked than coins issued.
• Algorithmic coins try to hold their price through code and incentives, often with little or no real reserves. This is the riskiest type.

What people use them for

• Moving value quickly between platforms.
• Sitting in "cash" during volatile markets.
• Buying other crypto without converting back to local currency each time.
• Sending money across borders, often at lower cost.

Where the risk hides

• Depegging: the price can fall below $1. In 2022 the algorithmic coin UST collapsed, and in March 2023 USDC briefly dropped below $1 after its issuer revealed exposure to a failing bank.
• Reserve quality: reserves may be risky, hard to sell quickly, or not fully disclosed.
• Issuer risk: the company can face legal, banking or regulatory problems.
• Platform risk: an exchange holding your stablecoins can fail or freeze withdrawals.
• Local currency risk: if your income is in Kenyan shillings, you still face the exchange rate between shillings and dollars.
• Fake tokens: scammers create lookalike coins and addresses. Always check the official contract or platform.

How to check a stablecoin

1. Who issues it, and is the company transparent?
2. Does it publish regular reserve reports, ideally checked by an independent firm?
3. Can you redeem it directly for dollars, and what are the limits and fees?
4. How has it behaved during market stress?
5. Is it widely used and easy to sell on reputable platforms?

Practical safety tips

• Avoid putting all your money in one stablecoin or one platform.
• Be very cautious with products that offer unusually high interest on stablecoins. High returns come from higher risk.
• Double-check the network and address before every transfer. A wrong network can mean permanent loss.
• Start with a small test transfer.

The bottom line

Stablecoins are a useful tool, not a guaranteed safe store of value. Understand what backs the coin, where you hold it, and never treat it as risk-free.