What are stablecoins and how to trade them?

Learn all about stablecoins, including how they work, their role in crypto markets, and how to trade stablecoins via CFDs.

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What is a stablecoin?

A stablecoin is a cryptocurrency whose value is based on a ‘peg’. A peg is the target value that a stablecoin aims for. Stablecoins are often pegged to a specific reference asset or algorithm, with the aim of maintaining stable prices over time. This means that stablecoins are suitable for everyday transactions, cross-border payments and hedging.

Stablecoins serve as a bridge between traditional financial systems and digital assets, as they combine the benefits of blockchain technology – like decentralisation, transparency and immutability – with low volatility, relative to other cryptocurrencies.

Here’s how stablecoins compare with other types of cryptocurrencies:

Many stablecoins are pegged 1:1 to fiat currencies, such as the US dollar. Some are pegged to commodities like gold, while others use algorithmic mechanisms to maintain stability without direct collateral.

For example, fiat-backed stablecoins like Tether (USDT) maintain their peg by holding reserves equivalent to the issued stablecoins, while algorithmic stablecoins like Dai (DAI) rely on supply-demand mechanics without collateral.

How do stablecoins work?

Stablecoins are cryptocurrencies designed to maintain a stable value by pegging their price to a specific asset, such as a fiat currency, a commodity, or a basket of goods. To achieve price stability, stablecoins use one of three primary approaches:

1. Fiat stablecoins

2. Commodity stablecoins

3. Algorithmic stablecoins

Here’s how the different stablecoin types work:

Stablecoin trading: What are the risks and opportunities?

Stablecoins offer a unique set of potential risks and opportunities when trading, due to their unique position as a bridge between cryptocurrencies and traditional financial markets:

Market stability

By pegging their price to a reserve of other assets, or an algorithm, stablecoins are designed to maintain a steady value over time. The stability of stablecoin prices can influence their role in trading.

Potential opportunities

• Safe haven asset – During periods of high high volatility in the cryptocurrency market, traders may flock to stablecoins to preserve capital.

• Arbitrage opportunities – Minor price deviations from the peg can offer arbitrage possibilities. However, transaction fees and low liquidity on certain platforms might limit potential arbitrage gains.

• Facilitating trades – Stablecoins can act as a medium of exchange between different cryptocurrencies, to simplify the trading process without reverting to fiat currencies.

Potential risks

• De–pegging events – Stablecoins could lose their peg due to extreme market conditions or liquidity issues, potentially leading to sudden price fluctuations.

• Liquidity risks – Smaller or lesser-known stablecoins may suffer from low liquidity, making it difficult to execute large trades without impacting the market price.

• Over-reliance on stability – Assuming that stablecoins are entirely risk-free can lead to complacency, ignoring underlying issues that may affect their value.

Regulatory environment

The legal environment for cryptocurrencies is evolving, which includes stablecoins. Regulatory scrutiny and policy changes contribute potential risks and opportunities for traders:

Potential opportunities

• Adoption and utilisation – Regulatory clarity can lead to broader acceptance of stablecoins in traditional financial systems.

• Institutional interest – Compliance with regulations may attract institutional investors, enhancing market liquidity and stability.

Potential risks

• Regulatory crackdowns – Stricter regulations or bans in certain jurisdictions can limit the use of stablecoins, affecting their availability and value.

Counterparty and operational risks

Stablecoins depend on the integrity and competence of their issuing entities and the platforms on which they operate.

Potential opportunities

• Trust in reputable issuers – Choosing stablecoins from well-established issuers with transparent reserves can reduce counterparty risk.

• Technological innovation – Some stablecoins utilise advanced technologies like smart contracts, offering additional features such as automated transactions.

Potential risks

• Issuer insolvency – Financial troubles faced by the issuing company can jeopardise the stablecoin's value, especially if reserves are insufficient.

• Smart contract vulnerabilities – Algorithmic stablecoins that rely on smart contracts may be susceptible to bugs or exploits, leading to potential losses.

• Lack of transparency – Opacity regarding reserve holdings and auditing practices can mask underlying problems.

Stablecoin trading strategies to consider

Here are some potential trading strategies aligned with stablecoins’ market dynamics. Choose one which suits your preferences, such as risk tolerance and time commitment. Here are some to consider:

Day trading strategy

Day trading involves executing multiple trades within a single day, in an attempt to capitalise on short-term price movements in stablecoin pairs. While stablecoins are designed to maintain price stability, slight deviations from their peg could create intraday opportunities.

Day trading is suited for traders who actively monitor the markets and rely on technical analysis to identify minor price deviations – such as in algorithmic trading.

Swing trading strategy

Swing trading focuses on short- to medium-term price movements, often holding positions for days or weeks. Swing traders might use technical analysis to identify overbought or oversold conditions in stablecoin pairs.

Swing trading might be considered by traders who prefer not to monitor the market constantly but are still looking to capitalise on periodic fluctuations.

Position trading strategy

Position trading is a longer-term approach, where traders tend to hold positions informed by macroeconomic factors or broader market trends. This trading strategy might be considered relevant for algorithmic stablecoins, which may experience greater volatility during market shifts.

Position trading is often employed by traders with a strong understanding of market fundamentals and the patience to hold trades over weeks or months.

Learn more trading strategies in our comprehensive trading strategies page.

What are the stablecoin trading hours?

Stablecoins often run on decentralised blockchain networks that are active 24 hours a day, seven days a week, 365 days a year. This means you can trade stablecoins like DAI at any time, including weekends and holidays.

• Cryptocurrency exchanges – many exchanges facilitate 24/7 trading, allowing for continuous market participation.

• Online trading platforms – some reliable and trusted brokerages provide stablecoin trading via CFDs.

If you choose to trade CFDs, you can follow the DAI performance live in US dollars with our comprehensive DAI/USD price chart.

Monitoring the cryptocurrency’s activity can help you to keep an eye out for any key fundamental or technical events that may affect short-term movements in its value.

How to trade stablecoins

Stablecoins are a type of cryptocurrency, meaning that they can be traded directly on a cryptocurrency exchange or peer-to-peer. Traders may also choose to trade stablecoins via a derivative, a financial product that takes (or ‘derives’) its value from the price of the underlying asset.

You could use a contract for difference (CFD), to trade on the price of stablecoin pairs – such as the DAI/USD price. A CFD is a contract, typically between a broker and a trader, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.

You can use CFDs to trade on whether you think DAI/USD will rise (called ‘going long’) or fall (‘going short’). CFDs give you access to leverage, allowing larger positions with a relatively small outlay. This amplifies your potential profits, but also your potential losses, making CFD trading risky.

You can learn more about trading cryptocurrencies with Capital.com in our comprehensive guide to cryptocurrency trading.

Aside from CFDs, you can also trade stablecoins through instruments like futures, options, ETFs, and mutual funds. Each offers an alternative to the leveraged trading of CFDs, suiting different risk profiles and investment strategies.

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*Stop losses are not guaranteed.

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