What is a stablecoin?

A stablecoin is a cryptocurrency designed to maintain a stable value, typically pegged 1:1 to a fiat currency like the US dollar (USD) or the euro (EUR). 

While Bitcoin’s price can swing 5-10% in a single day, a USD stablecoin like USDC aims to always be worth exactly $1.00. Stablecoins combine the programmability and speed of crypto with the price stability of traditional money — making them useful for payments, trading, savings, and as a bridge between crypto and fiat.

How stablecoins work

Fiat-Backed stablecoins

The most common type. The issuer holds real fiat currency (or short-term government bonds) in reserve — one dollar in the bank for every stablecoin in circulation. When you buy 1 USDC, Circle (the issuer) holds $1 in reserve. When you redeem, they give you $1 and burn the USDC.

Examples: USDC (Circle, USD-pegged), USDT/Tether (Tether Ltd, USD-pegged), EURC (Circle, EUR-pegged).

Algorithmic stablecoins

These use algorithms and smart contracts to maintain the peg without holding full fiat reserves. The most famous example, TerraUSD (UST), collapsed spectacularly in May 2022, losing $40+ billion in value in days. This collapse significantly damaged trust in algorithmic approaches.

Crypto-Backed stablecoins

Backed by cryptocurrency held in smart contracts, over-collateralized to absorb price volatility. Example: DAI (backed by ETH and other crypto at 150%+ collateralization). More decentralized than fiat-backed stablecoins but more complex.

USDC vs USDT

The two largest USD stablecoins differ significantly in transparency and regulation:

For European users on regulated platforms, USDC is generally preferred due to its higher transparency and MiCA compliance. Bitwala supports USDC as part of its asset offering.

Stablecoins under MiCA

MiCA introduced specific rules for stablecoins, creating two categories:

E-Money Tokens (EMTs): Stablecoins pegged to a single fiat currency (like USDC or EURC). Issuers must hold reserves equal to 100% of tokens in circulation in secure, segregated accounts. Redemption rights are guaranteed — holders can redeem at par value at any time. Issuers must be licensed as electronic money institutions.

Asset-Referenced Tokens (ARTs): Stablecoins backed by a basket of assets (multiple currencies, commodities, etc.). Subject to even stricter requirements including additional capital buffers.

For European users, MiCA’s stablecoin rules mean that stablecoins available on regulated platforms like Bitwala have verified reserves and guaranteed redemption — a significant improvement over the pre-MiCA era.

How europeans use stablecoins

Trading pair: Many crypto trading pairs are denominated in USDC or USDT rather than EUR. Stablecoins provide a way to “park” value in a stable asset without converting back to EUR.

Cross-border payments: Sending EUR to another country via SEPA takes hours. Sending USDC takes minutes and works 24/7 including weekends and holidays.

Savings in USD: European investors who want USD exposure without opening a US bank account can hold USDC. This provides de facto USD savings with the ability to convert back to EUR at any time.

DeFi participation: Stablecoins are the primary currency in decentralized finance — used for lending, borrowing, and liquidity provision.

Risks of stablecoins

Depegging risk: Stablecoins can temporarily lose their peg. USDC briefly dropped to $0.87 in March 2023 when Silicon Valley Bank (which held a portion of USDC’s reserves) collapsed. The peg was restored within days, but the event demonstrated that even well-managed stablecoins carry risk.

Issuer risk: Fiat-backed stablecoins depend on the issuer maintaining reserves and operating honestly. If the issuer mismanages reserves or faces insolvency, the stablecoin could lose value.

Regulatory risk: Regulators may restrict or ban certain stablecoins. MiCA has already forced some stablecoins to seek compliance or exit the European market.

Not insured: Unlike EUR in a bank account (insured up to €100,000 under EU deposit guarantee schemes), stablecoins are not deposit-insured. Your stablecoin holdings are not protected by any government guarantee.