Stablecoin: A Less Volatile Crypto Asset for 2025 Investors

If you like the idea of investing in crypto but hesitate because of insane price swings, look into stablecoins. Stablecoins are a type of cryptocurrency that behaves much more predictably than bitcoin and other digital currencies. This agile asset combines the fluidity of crypto with the consistency of traditional investments.

Table of Contents

1. What is stablecoin? 
2. How do you invest in it? 
3. Stablecoin advantages and disadvantages
4. How to start investing in stablecoin 
5. FAQ 

What is stablecoin? 

Conventional crypto tokens like bitcoin are fully autonomous assets. In contrast, stablecoins are pegged to other assets that serve as collateral, such as fiat currency, gold, or other cryptocurrencies, or are governed by algorithms that control their price. 

Stablecoins are generally subject to more government regulations than other cryptocurrencies. This makes stablecoins more—you guessed it—stable than bitcoin and altcoins. Stablecoins can be an appealing choice for investors who want to trade on the blockchain but would rather avoid the unpredictability typical of crypto.

One major difference between various stablecoins is the system that anchors their price. Fiat-backed stablecoins are likely the best-known type, but you may also encounter gold-backed, crypto-backed, and algorithmic tokens.

Fiat-backed

The value of fiat-backed stablecoins is tied to fiat currencies, such as the U.S. dollar or the euro. Each token is backed by an equivalent sum of fiat currency held in reserve like a traditional bank. 

Fiat-pegged stablecoins include Tether, USD Coin, and First Digital USD. A token’s price should match the corresponding cryptocurrency 1:1 (e.g., 1 Tether = 1 USD). 

This type of stablecoin couples the liquidity of crypto with the stability and regulatory supervision of fiat money. On the flip side, these crypto coins would be as vulnerable as fiat currency in a banking crisis. 

Commodity or gold-backed

These stablecoins are valued to gold, silver, oil, or other tangible commodities. For example, one Tether Gold (XAUT) token is worth a troy ounce of gold held in a storage facility. 

Since physical assets back commodity-pegged stablecoins, these crypto tokens have a high inflation-resistance potential and tend to keep a steady value. However, they need transparent auditing and reliable storage for the collateral. 

Crypto-backed

Crypto-pegged stablecoins use other crypto assets, like bitcoin or ethereum, as backing. This creates full decentralization and more flexibility than backing stablecoins with fiat or gold since crypto-backed stable tokens don’t need banks or storage. One example is DAI, backed by ethereum and other cryptocurrencies.

Crypto-backed coins are less stable than fiat- or commodity-pegged stablecoins. To compensate for that, these currencies use overcollateralization, i.e., the backing cryptocurrency holds a higher value than the token to cushion against price swings. 

Algorithmic

Algorithmic stablecoins use smart algorithms rather than collateral to keep stable value. The system adjusts coin supply to prices: If the price crosses a certain threshold, the algorithm produces more tokens; if the price drops, so does coin supply. Two stablecoins in this category are Frax (FRAX) and Ampleforth (AMPL).

Algorithmic stablecoins are scalable, decentralized, and flexible. However, they’re vulnerable to collapse if demand plunges (a scenario known as “depegging”).

Is stablecoin a good investment in 2025?

It’s been reported that stablecoins made up about 8.2% of the crypto market in 2024. As of April 2025, the total market cap of stablecoins is over $230 billion, up from just over $62 billion in April 2021. Stablecoins have grown by 2.28% in the past month alone. That’s a favorable trend if you’re considering investing in this variation of crypto assets. 

Why fiat-backed stablecoins dominate the market

Fiat-backed stablecoins are by far the most popular type, making up more than 97% of the market today. When you look at charts by CoinGecko, a website that provides analysis of the crypto market, you’ll see that fiat-pegged stablecoins have grown over the past year, increasing their market cap from around $150 billion in July 2024 to over $229 billion in March 2025. 

Stablecoin investors tend to favor fiat-backed coins because these tokens are pegged to reliable fiat currencies held in secure reserves. You can usually redeem stablecoins for fiat money at a 1:1 ratio. Regulation and independent auditing add another layer of security.

Crypto-backed stablecoins are far more volatile. Their value is tied to inherently unstable cryptocurrencies. That’s why these stablecoins need overcollateralization. Algorithmic stablecoins are even riskier, since they rely on supply and demand algorithms that can fail, as happened with Terra in 2022.

Commodity-backed stablecoins

The most popular commodity-backed stablecoins are Tether Gold (XAUT) and PAX Gold (PAXG), both of which tie their value to the price of gold. One token of both these stablecoins equals one troy ounce (31.1 grams) of pure gold.

Despite their current modest market share, gold-backed stablecoins appear to be a promising investment. Their value goes hand-in-hand with gold, a tangible, historically proven asset, which gives them a high degree of stability. 

While buying and selling physical gold involves complex logistics like packaging, transportation, and insurance, you can instantly trade tokenized gold on the blockchain. This makes gold-pegged stablecoins a handy decentralized finance (DeFi) alternative to bullion.

Read More

What was the highest price of gold ever?

Should you invest in stablecoins?

This depends on your goals. If you want a flexible, highly liquid asset that allows you to invest in crypto while avoiding extreme volatility, stablecoins could be a good option.

On the other hand, if you’re looking for a cryptocurrency with high growth potential, bitcoin and other conventional crypto tokens may be a better choice. Bitcoin performs as “digital gold,” appreciating thanks to built-in scarcity that stablecoins lack.

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Disclaimer:

Always consult a professional advisor before investing any significant amount in crypto assets.

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When additional expertise is needed, I may refer clients to a Certified Financial Planner (CFP®) with a Certified Digital Asset Advisor (CDAA) designation, a crypto consultant, or a CPA or tax attorney who specializes in the tax implications of crypto asset ownership.

How do you invest in stablecoin? 

If you want to take the next step in stablecoin ownership, you may explore several options, including holding, lending, and long-term investment via an IRA.

Holding stablecoins

A basic way to get started with stablecoins is simply buying some and placing them in a secure crypto wallet. You can purchase stablecoins on any reputable crypto exchange, like Kraken or Coinbase. 

Stablecoins stored this way won’t generate returns but are handy for quick crypto transactions when you want to use a digital currency with a steady value. Stablecoins may also outperform fiat money during sharp inflation if they’re tied to a currency other than the U.S. dollar.

Lending stablecoins through DeFi platforms

If you’re feeling a bit more adventurous, you could use your stablecoin holdings to generate passive income via lending platforms like Aave or Compound. This is how it works: You deposit stablecoins into a platform, which puts your assets into a lending pool. Then you earn interest when borrowers access your crypto funds. 

However, remember that lending platforms aren’t 100% risk-free. Hacking, code bugs, and even platform insolvency could cause lenders to lose money. Protect your holdings by sticking to trusted DeFi platforms and monitoring interest rates.

Crypto IRAs

Crypto IRAs can also hold stablecoins. You may consider adding stablecoins to your IRA if you’re playing the long game in crypto investments, looking to diversify your portfolio, and want to reap all the IRA-associated tax advantages.

Crypto IRAs are self-directed IRAs (SDIRAs) that must follow IRS guidelines, like operating through a licensed custodian. You can profit from tax-deductible contributions and tax-deferred growth (with a traditional crypto IRA) or qualify for tax-free distributions (with a Roth crypto IRA). 

For example, BitIRA offers an IRA plan focused on DAI, a decentralized stablecoin pegged 1:1 to the U.S. dollar and backed by several cryptocurrencies. The company suggests diversifying crypto holdings with stablecoins to reduce risks and mitigate losses during dips in the crypto market.

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Tip:

See our guide to the best crypto IRAs for more.

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Advantages and disadvantages of investing in stablecoin

Before you take the leap and start buying stablecoins or open a stablecoin IRA, make sure you understand the pros and cons of this crypto asset. 

Pros

• Stability

  Since the value of stablecoins is usually tied to other assets, like fiat currencies or precious metals, they’re less prone to wild swings than regular cryptocurrencies. Thus, there’s less risk a crypto market crash would wipe out half your holdings’ worth overnight. 

• Crypto asset protection

  If you want to weather a crypto bear market without cashing out entirely, converting part of your crypto holdings into stablecoins could help protect your investment from devaluation. 

• Speed and flexibility

  Stablecoins enable fast transactions, often at much lower fees than traditional bank transfers. You can use stablecoins to pay or trade through DeFi platforms without relying on centralized financial systems.

Cons

• Reserve and counterparty risks

  Stablecoins have failed before and could do so again. If, for example, a stablecoin is not fully backed by independent reserves or if the commodity backing the stablecoin devalues (as in a fiat currency collapse), investors could lose money. 

• Limited growth potential

  Stablecoins are designed for steady value, which could be an advantage or a drawback depending on what you aim for. If you’re seeking massive returns, bitcoin and altcoins could be a more appealing choice than stablecoins.

• Potential restrictions

  Crypto investors often aim for decentralization and independence. However, many stablecoins, specifically fiat-backed cryptocurrencies, are centralized. As such, they’re vulnerable to government restrictions, potential unfavorable regulations, or freezes. 

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To determine whether a crypto investment is appropriate for my clients, I start by revisiting their risk tolerance and reviewing their financial goals to ensure the investment aligns with their overall plan.

I make it a priority to educate them on the risks associated with crypto—particularly its volatility, the heightened risk of scams, and the current lack of regulation—while emphasizing the importance of a well-diversified portfolio. I typically recommend allocating no more than 5% of their total investable assets to crypto.

How to start investing in stablecoin 

Becoming a stablecoin investor is fairly simple as long as you know what you want to achieve, avoid unnecessary risks, and keep track of your holdings.

1. Select a stablecoin

First, figure out your goals. Do you want a solid fiat-backed currency for crypto transactions? Go for widely circulated stablecoins like Tether or USDC. Do you like the idea of a crypto coin backed by a time-tested, tangible commodity? Consider gold-pegged stablecoins like PAXG. We recommend selecting well-regulated stablecoins with robust reserves.

2. Choose an investment strategy

If you just want to experiment with buying, holding, and DeFi trading in stablecoins, go to a reputable crypto exchange and purchase your cryptocurrency. Move your assets to secure storage, ideally in a cold wallet that reduces the risk of cyber threats.

If you approach stablecoin investment with a more long-term outlook and want tax advantages, consider setting up a crypto IRA. Explore companies like Bitcoin IRA, BitIRA, Alto Crypto, and iTrustCapital. Note that the selection of available cryptocurrencies may differ by IRA provider, so make sure the company you choose supports your preferred stablecoin.

3. Build a passive income stream

Once you feel ready, you may direct your stablecoin assets to generate income on DeFi lending platforms. Some crypto IRA plans allow you to earn interest in a similar way. 

Your gains accumulate in your holdings, allowing your retirement savings to grow rather than simply maintain their value. Stablecoin lending through a crypto IRA offers the benefits of tax-deferred growth (similar to a traditional IRA) or tax-free distributions (similar to a Roth IRA), whereas interest gains from other lending options could be taxable.

4. Track regulations and risks

Stablecoins debuted only a little over a decade ago. As a new asset, they’re subject to evolving regulations, market shifts, and changes in DeFi platform policies. 

If you’re adding stablecoins to your retirement portfolio, check IRS guidelines. Diversifying and choosing established currencies and platforms can help protect your investments.

FAQ 

What are the top five stablecoins?

As of April 2025, CoinMarketCap lists Tether, USDC, Ethena USDe, DAI, and First Digital USD as the top stablecoin tokens. Crypto platforms typically rank stablecoins by their market capitalization, i.e., [the stablecoin’s total supply] x [current price]. These rankings may change often, so keep following the lists. 

What is a stablecoin in crypto?

Stablecoins are cryptocurrencies modeled to maintain a comparatively steady price. To achieve this goal, the crypto tokens anchor to other assets (like the dollar or gold) or follow an algorithm that guards their value against sharp fluctuations. 

Because stablecoins are less volatile than conventional cryptocurrencies, some crypto investors prefer them for payments, trading, and value storage.

Is ethereum a stablecoin?

No. Ethereum is a decentralized blockchain platform that uses its native cryptocurrency, the ether (ETH), for transactions. As a conventional crypto token, ETH is susceptible to major price swings. However, several stablecoins, like the USDC, USDT, and DAI, run on the ethereum blockchain.

What is the safest stablecoin?

Reliable collateral, thorough third-party audits, and transparent, clear reports are among the key features of safe stablecoins. While it’s hard to say which stablecoin is “safest,” the USD Coin (USDC) enjoys the reputation of a highly dependable token. 

S&P Global Ratings states that USDC has a strong ability to maintain its peg to the U.S. dollar. A similar evaluation for Tether (USDT) describes its capacity to stay pegged as “constrained.” Nevertheless, Tether is also a fairly dependable token and remains the most widely circulated stablecoin.

How do stablecoins make money?

Two major ways stablecoins make profits are transaction fees and interest. Platforms may charge fees on withdrawals and other transactions. When users buy stablecoins with fiat money, traders can hold this money in banks or direct it toward investments that generate revenue.