Stablecoins

The first stablecoins were issued in 2014 in an attempt to combat the volatility associated with cryptos like Bitcoin. Today, the market capitalisation of these new digital currencies stands above £6.5 billion with Tether’s USDT leading the pack. Here we review stablecoins, with definitions explained and the respective merits and drawbacks detailed. We also explain how retail investors can start trading stablecoins.

What Is A Stablecoin?

Stablecoins are digital currencies pegged to assets with low levels of volatility, such as fiat money like GBP, commodities like gold, or other cryptos like Ripple (XRP). They are essentially a hybrid coin that balances the benefits of cryptos, such as secure money transfer and blockchain technology, with the price stability associated with precious metals, for example.

How Do Stablecoins Work?

There are several types of stablecoins, those pegged to established assets and those that aren’t, known as seigniorage-style. Stablecoins pegged to an asset like gold and are subject to the same price movements, market risks, and regulatory requirements. The purpose of a seigniorage-style mechanism is to use algorithms to control the supply of a coin much like the World Bank printing and destroying money.

Currency-Backed Stablecoins

Fiat-backed stablecoins are tied to a currency, such as the GBP. A third party will hold a reserve of the currency and peg it to crypto, with the stability and value aligned to the cost of maintaining the currency reserve, including any legal requirements such as compliance audits. Stablecoins can be pegged to one currency or multiple, with the US Dollar, Euro, Yen and Yuan the most common. The ratio of the stablecoin vs traditional currency is fixed and reflects the market supply of the crypto.

Currency-backed stablecoins are the most popular type with leading assets including Tether (USDT), USD Coin (USDC), and Gemini Dollar (GUSD). But whilst USDT is the largest by market share, the Bitfinex exchange who facilitated trading in the asset came under public scrutiny after being unable to provide audits for their reserves.

Commodity-Backed Stablecoins

Commodity-backed stablecoins are tied to physical assets such as energy and precious metals, with gold the most frequently used. Because a digital currency is pegged to the value of the commodity, its price may fall if demand for silver drops, for example. Stablecoins are redeemable at the conversion rate to take possession of the asset and can be pegged to more than one commodity.

Crypto-Backed Stablecoins

Crypto-backed stablecoins use smart contracts via blockchain technology while currency-backed stablecoins are validated off the blockchain. Since cryptocurrencies have a history of volatility, if there is a sudden price crash the smart contract may be liquidated. As a result, it’s worth paying off the debt on the smart contract in the event the value of the crypto drops.

There are limited regulations or monetary policy requirements to adhere to with cryptocurrency-backed stablecoins which are often stored on decentralised exchange indexes. Organisations typically over-collateralise and store more of the pegged digital currency to protect against market fluctuations. However, this can be easier to audit as a company’s collateral balance can be checked on the blockchain.

Seigniorage-Style

Non-backed stablecoins do not use a reserve but operate like central banks by increasing or decreasing the supply of a coin to maintain price stability. This is achieved by using algorithms and smart contracts which manage the supply ratio. If the price of the stablecoin surpasses the value of the fiat currency it tracks; more tradable coins will be released driving down the price. The opposite will take place should the price of the stablecoin fall.

Best Stablecoins In 2025

Topping the list of the best 5 stablecoins in 2025 is:

1. Tether (USDT) – The best-known stablecoin is pegged to gold, fiat currency and cash equivalents
2. True USD (TUSD) – The leading coin is backed by the US Dollar and is among the most liquid options on the market. The company behind the asset, TrustToken, also offers TrueGBP, which is pegged to the Pound Sterling
3. Paxos Standard (PAX) – The stablecoin seeks 1:1 parity with the US Dollar
4. USD Coin (USDC) – Backed by crypto heavyweight Coinbase, the world’s largest Bitcoin broker has released its own popular stablecoin
5. Binance USD (BUSD) – Another of the top 10 crypto exchanges, Binance’s stablecoin is pegged to the US Dollar at a 1:1 ratio

How To Start Trading Stablecoins

Choose An Exchange

Stablecoins are available to trade on key cryptocurrency exchanges, with examples including Coinbase, Binance, Exodus, Kraken and, Crypto.com. Each exchange provides a list of tradable coins and any fees for UK traders. We recommend opting for a provider with good user reviews and a decent range of assets compared with rankings.

Open An Account

Once traders have decided on an exchange they will need to open a live trading account. Some crypto exchanges permit signing up without KYC documentation, however, most will need identity documents to be approved, including Coinbase. This helps to reduce the risks posed by fraud and money laundering.

Deposit Funds

Before you can start buying and selling stablecoins, you will need to deposit funds. This can usually be done via traditional depositing methods such as Mastercard or e-money transfers. Traders can protect their Stablecoin portfolio by investing in a hardware wallet such as those seen on the XRP Ledger, though it’s worth doing your own comparison of providers before investing. Crypto wallets help protect a user’s private keys (transaction data codes) from hackers.

Research

Stablecoins are becoming an increasingly popular investment vehicle leading to a growth in the volume of information available online. Popular research articles include ‘Stablecoins: A Brave New World’, ‘Stablecoins: The Quest for a Low- Volatility Cryptocurrency’, and ‘Stablecoins: Use Cases and, Stablecoins for Dummies.’ Prospective investors can also make use of online lists that publish data on popular assets, including CoinMarketCap.

Pros Of Stablecoins

Reasons to start buying and selling stablecoins include:

• Crypto technology – Retains the secure nature of cryptocurrencies by executing transactions on the blockchain
• Online information – Traders can educate themselves with the wealth of free online articles and reports
• Hybrid asset class – A medium of exchange that bridges the gap between fiat currency and altcoins
• Earn interest – Interest rates on stablecoins are typically greater than high-yield savings accounts
• Less volatile – Stablecoins offer a safer alternative to day trading erratic cryptos like Bitcoin

Cons Of Stablecoins

There are also some drawbacks to buying, lending and selling stablecoins:

• Unclear tax policies – Charges and taxes may apply when trading stablecoins
• Complex setup – The novel nature and differences of this emerging crypto class may deter investors new to altcoins
• Centralisation – The central influence of fiat or commodity-backed stablecoins arguably contradicts the decentralised nature of cryptocurrencies
• Profit potential – The stable nature of these coins means reduced price swings and trading volumes which may limit the profit a day trader could generate, for example. Instead, investing in stablecoins is likely a longer-term game
• Transparency – As highlighted by the Tether lawsuit, some companies issuing and selling stablecoins may be untrustworthy. This lack of transparency can affect the value of coins and impact investor confidence
• Global market regulation – The world, including the UK, is still grappling to introduce rules and regulations to monitor the use of cryptocurrencies. Aside from differing rules, it’s difficult to predict what the future holds for cryptos and stablecoin stock which makes it challenging to forecast their future value. Keep an eye on news announcements from the likes of Rishi Sunak, Chancellor of the Exchequer, who has been involved in potential crypto risks and regulations.

Final Word On Stablecoins

Despite some challenges, trading stablecoins is on the rise. They are emerging as a prominent class of cryptocurrencies that aim to bring stability to a hugely volatile marketplace while retaining the flexibility and underlying technology behind altcoins. Several exchanges offer the best stablecoins in 2025, with Coinbase topping our list of recommended brokers.

FAQ