Cryptocurrencies: Bitcoin, Stablecoin Dominating The Crypto Market

Cryptocurrencies are digital or virtual assets that use cryptography for security and operate on decentralized networks based on blockchain technology, enabling peer-to-peer transactions without the need for intermediaries like banks. They are designed to function as a medium of exchange, a store of value, or a unit of account.

Bitcoin, the first and most well-known cryptocurrency, was created in 2009 and is characterized by its limited supply and high price volatility, for now making it more suitable as an investment or hedge against inflation than for everyday transactions.

Stablecoins are a specific type of cryptocurrency designed to minimize price volatility by pegging their value to a stable external asset, such as a fiat currency (like the US dollar), a commodity (like gold), or a basket of assets.

This pegging mechanism allows stablecoins to maintain a relatively constant value, making them more practical for use in everyday transactions, remittances, and as a stable store of value within the volatile cryptocurrency ecosystem. They are often used as a bridge between traditional finance and digital assets, enabling faster and cheaper cross-border payments and serving unbanked populations.

The global market for stablecoins has seen significant growth, with a collective market capitalization exceeding $250 billion as of 2025, and total transfer volume surpassing the combined volume of Visa and Mastercard in 2024. The market is dominated by fiat-backed stablecoins, with the US dollar being the most common peg.

Issuers of fiat-backed stablecoins often establish a reserve fund holding real-world assets. So, if a stablecoin is backed by the U.S. dollar, the issuer might hold $100 million to support 100 million stablecoins. When a user wants to redeem their stablecoin, the issuer can draw from this reserve to provide the equivalent amount of fiat currency.

Stablecoins offer several key benefits.

• Reduced transaction fees: Many cryptocurrency exchanges skip the fees for users converting to or from stablecoins. Instead of cashing out into U.S. dollars (and racking up fees each time), traders can park their funds in stablecoins right on the exchange. This lets them wait out market dips or jump on a rally without losing any purchasing power in the process.

• Hedging against volatility: By holding stablecoins, traders can protect their investments from the price swings inherent in the crypto market.

• Passive income opportunities: Some stablecoins allow users to earn interest through staking or lending. For example, Coinbase offered a 4.1 percent reward to users who held USDC on the platform in July 2025.

While stablecoins offer significant advantages in stability and utility, they are not without risks. Centralized stablecoins like USDT and USDC can be frozen or burned by their issuers for regulatory compliance, raising concerns about user autonomy.

Sufficient reserves ensure that stablecoins can maintain their peg even during periods of market volatility. Without backing, a stablecoin can fall victim to runs, in which investors rush to redeem their tokens, potentially toppling the entire system.

Among the riskiest types of stablecoins are algorithmic stablecoins like USDD, which rely on market incentives and algorithms to maintain their value, but aren’t backed by real assets.

Algorithmic stablecoins, which rely on supply adjustments rather than reserves, are particularly vulnerable to "death spiral" events where a loss of confidence leads to a rapid de-pegging and collapse. Algorithmic stablecoins relies on technical mechanisms, such as adjusting the supply of coins, to keep the price stable. This approach is riskier because it’s more susceptible to market fluctuations and technical failures.

Crypto-backed stablecoins, such as Dai, are also high-risk. They maintain their dollar peg by using over-collateralized cryptocurrencies locked in smart contracts, making them vulnerable to the volatility of the underlying assets and technical flaws in the smart contracts.

Another type of high-risk stablecoin are synthetic stablecoins backed by derivatives and futures trading. This is because rather than the stablecoin, such as USDe, being pegged to cash or cash equivalents, futures are used to generate yield for investors while also attempting to maintain the token’s value.

TerraUSD, once the third-largest stablecoin by market cap, is a stark example of the pitfalls of algorithmic stablecoins. TerraUSD relied on a complex system of arbitrage and other cryptocurrencies to maintain its 1:1 peg to the U.S. dollar.

However, in 2022, a sudden crash eroded confidence in the system, leading to a catastrophic collapse. As investors panicked and sold off their TerraUSD tokens, the price plummeted, and the peg broke and never recovered.

Fiat-backed stablecoins are considered safer than some other stablecoins because they’re backed by reserves of cash or government bonds.

Regulatory scrutiny is also increasing globally, with the United States passing landmark legislation in July 2025 to regulate US dollar-backed stablecoins, aiming to enhance consumer protection and market stability. Despite these challenges, stablecoins are poised to play an increasingly significant role in global financial systems

The following are the top stablecoins in global use.

Tether (USDT): The largest stablecoin by market capitalization, with over $159 billion as of July 2025. It is pegged to the US dollar and backed by reserves, primarily consisting of low-risk U.S. Treasury bills.

USD Coin (USDC): The second-largest stablecoin, with a market capitalization of over $63 billion Issued by Circle, it is also pegged to the US dollar and backed by audited reserves.

Dai (DAI): A decentralized stablecoin issued by MakerDAO, backed by a basket of other cryptocurrencies held in overcollateralized smart contracts. It is designed to maintain a 1:1 peg with the US dollar without relying on a centralized issuer.

Ethena USDe (USDe): A stablecoin that uses a novel algorithmic mechanism combined with a treasury of US dollar-denominated assets to maintain its peg.

World Liberty Financial USD (USD1): A stablecoin issued by Trump family-backed World Liberty Financial, pegged to the US dollar.

First Digital (FDUSD): A stablecoin issued by First Digital, also pegged to the US dollar.