Are stablecoins actually stable?

They are meant to be, and that word carries the weight. The unit itself contains no internal mechanism setting its price; the price forms in a market like that of any traded good. What holds it near its reference is a construction outside the unit, and that rests on three conditions. First, the backing must exist and hold value. Second, the redemption path must function. Third, enough participants must be willing to arbitrage deviations away. None of those is a constant, and they typically change in phases when a great deal is already in motion. That is not an argument against stablecoins but an argument for choosing deliberately rather than inheriting a default.

What types of stablecoin construction exist?

Three are common, and they differ in what the promise rests on. In the first, the issuer holds value off the blockchain, for instance in the reference currency or in short dated claims, and issues units against it, so the link rests on redemption with the issuer. In the second, units arise through overcollateralisation with crypto assets on chain, which is verifiable but carries its own dependency because the collateral consists of crypto assets. In the third, the link is meant to arise from rules steering supply and demand without a corresponding value being held, so the promise rests entirely on the mechanism functioning and on participants' confidence in it.

Does it matter whether I post a stablecoin or the crypto asset as collateral?

Yes, because the two produce different risk profiles. When a derivatives position is collateralised with a stablecoin, your collateral depends on an issuer's promise while your trading result depends on the price of the instrument traded. Those two risks sit on top of each other and do not offset. Collateralising with the crypto asset itself means collateral and traded asset share one source instead. Neither arrangement is better or worse, but they are not the same, and the differences feed into how your metrics are calculated. The practical consequence is to record in your journal what the collateral consisted of rather than only how much of it there was.

Stablecoin Risk Explained: What Your Choice Means

Q: What should my trading journal record about stablecoins?

Two things, both cheap to maintain when settled from the start. First, the stablecoin used per trade, because without that field you later see only a slightly different result and no reason for it. Second, the rule not to change your settlement currency mid year, because your metrics are time series and a time series does not tolerate a change of unit. Switching in May means the year can only be analysed in two segments afterwards. If a change is unavoidable, note the date and the reason and treat the series as deliberately split, since a visible break is more honest than an analysis quietly mixing two units together.

Q: Do I carry currency risk when holding a stablecoin?

If your account currency differs from the stablecoin's reference, yes. A stablecoin linked to another currency is not a stable quantity for you but a foreign currency position. While you trade and calculate in that unit it goes unnoticed. The moment you view your result in your account currency or convert funds back, a movement enters that has nothing to do with your trades, so a good trading year in the settlement currency can come out differently at home. That is why it pays to keep your result in both units: in the settlement currency to judge trading decisions, and in your account currency to see what actually arrives.

A stablecoin is not a neutral unit of account but a position carrying its own risk. Its link to a currency is a promise made by an issuer rather than a law of nature, and how that link is produced differs completely between constructions. Treating stablecoins as a given means leaving part of your risk unrecorded, and specifically the part that never shows up in your own numbers.

What is a stablecoin technically?

A unit held on a blockchain whose value is meant to track a reference, usually a state issued currency. The decisive word there is meant: the unit itself contains no internal mechanism that sets its price.

The price forms in a market like that of any other traded good. What holds it near its reference is a construction outside the unit itself, and that construction varies substantially between variants.

For you as a trader one reframing follows: treat a stablecoin not as an account currency but as an instrument you hold. The right questions then arise on their own, namely who stands behind it and what happens if the promise is not kept.

How is the link produced?

Three constructions are common. They differ in what the promise rests on and who honours it.

Backing by assets held off the blockchain

The issuer holds value in the reference currency or in short dated claims and issues units against it. The link rests on units being redeemable with the issuer against those held assets.

The relevant questions here are: who may redeem, on what terms, and how the existence of the backing is examined and published. A redemption right open only to large partners is indirect protection for you as a trader rather than direct protection.

Overcollateralisation with crypto assets on chain

Units come into existence when users post crypto assets as collateral, at a value above the sum issued. If the collateral falls below a threshold, it is liquidated automatically.

This variant is verifiable on the blockchain, which is a genuine advantage. It carries a dependency of its own in exchange: the collateral consists of crypto assets, whose prices move sharply in stressed phases, precisely when liquidation would need to happen.

Mechanisms without posted backing

Here the link is meant to arise from rules steering supply and demand without a corresponding value being held. The promise then rests entirely on the mechanism working and on participants' confidence in it.

Without backing there is no anchor to fall back on in case of doubt. That is not a judgement on individual projects but a property of the construction.

Why is the link a promise rather than a law of nature?

Because it depends on conditions that sit outside the price. A stablecoin stays near its reference only for as long as, first, the backing exists and holds value, second, the redemption path functions, and third, enough participants are willing to arbitrage deviations away.

None of those three is a constant. They can change, and they typically change in phases when a great deal is already in motion. That is exactly when you need access to your funds.

In practice this does not mean avoiding stablecoins. It means making the choice deliberately and documenting it, rather than inheriting it as a default setting.

Why are you holding stablecoins in the first place?

The question sounds banal and still sorts out most of the confusion. Three purposes are common, and they call for different answers.

As a trading medium. You need the unit because trading happens in it. Holding periods are short here, and the construction risk is correspondingly bounded.
As a parking position between trades. Here a few hours quickly become a permanent position without any decision ever being made about it.
As collateral for derivatives. Here the unit is the precondition for another position continuing to exist at all.

The middle case is the one that most often goes unnoticed. Staying in stablecoins between two trades means holding a position in an issuer's promise without experiencing it as a decision. Anyone taking longer breaks should therefore decide deliberately whether to remain in that unit or return to their own account currency.

Which questions should you ask before choosing?

Five that need no specialist knowledge to understand, provided the issuer answers them:

Who issues the units and under which jurisdiction?
What does the backing consist of and how is it examined and published?
Who holds a redemption right and on what terms?
Can units be frozen or blocked, and who decides that?
Which blockchain are you holding them on, since the same unit can exist on several networks and trade differently on each?

The fourth is the one most often overlooked and has the most immediate bearing on your day to day trading. How to secure your access and withdrawal paths is covered under securing your crypto account.

What do you do if the price drifts from its reference?

You decide that beforehand rather than during. A deviation is exactly the situation in which thinking clearly is hardest, because it appears rarely, suddenly and without a clear picture.

So settle two things in advance. First, a threshold at which you react at all, so small fluctuations trigger nothing. Second, what that reaction is, meaning whether you switch to another unit, reduce open positions, or do nothing and sit the deviation out.

One thing explicitly does not belong on that list: treating a deviation as a bargain and buying more. That is a separate trade idea requiring its own justification rather than part of your risk management, and it certainly does not belong in a position you hold purely for settlement.

Record the episode in your journal too, with the date and the size of the deviation. Otherwise the effect shows up later as an unexplained difference in your results.

What does this mean for your journal?

Two things, and both cost little effort when settled from the start.

First, record per trade which stablecoin was used for settlement. That sounds like a detail but is the precondition for attributing any deviation at all. Without the field you later see only a slightly different result and no reason for it.

Second, do not change your settlement currency mid year. Your metrics are time series, and a time series does not tolerate a change of unit. Switching in May means the year can no longer be analysed as a whole, only in two segments.

If a change is unavoidable, note the date and the reason and treat the series as deliberately split. A visible break is more honest than an analysis quietly mixing two units. How such differences otherwise feed into your records is covered in the crypto trading journal guide.

Why is a stablecoin as collateral a different thing?

Because two risks sit on top of each other without offsetting. When a derivatives position is collateralised with a stablecoin, your collateral depends on an issuer's promise while your trading result depends on the price of the instrument traded.

That distinguishes the arrangement from collateralising with the crypto asset itself, where collateral and traded asset share one source. Neither is better or worse, but they are not the same, and the differences feed into how your metrics are calculated. The groundwork sits under crypto futures vs spot, and the ongoing costs of such positions under funding rates explained.

Practical consequence: record in your journal what the collateral consisted of, not only how much of it there was. Without that, trades from different periods cannot be compared cleanly later on.

What about the exchange rate to your home currency?

This is the most underestimated point for anyone whose account currency differs from the stablecoin's reference. A stablecoin linked to another currency is not a stable quantity for you but a foreign currency position.

While you trade and calculate in that unit, it goes unnoticed. The moment you look at your result in your home currency or convert funds back, a movement enters that has nothing to do with your trades. A good trading year in the settlement currency can come out weaker at home, and the reverse happens too.

So it pays to keep your result in both units: in the settlement currency to judge your trading decisions, and in your home currency to see what actually reaches your account. A consistently kept crypto trading journal can hold both views side by side, provided the conversion rate is recorded per event.

Understanding Stablecoins: What Your Choice Means for Risk