How Should Investors View Stablecoins: As a Utility or a Speculative Asset?

Key Points

• Stablecoins exist to move fiat currency value onto blockchains.

• They shouldn't ever grow much in value.

• Not all of these assets are equally safe or equally easy to use.

• 10 stocks we like better than Tether ›

Cash has always been the grease of capitalism, shuffling quietly from buyer to seller so the real business can get done. In crypto, something still has to play that crucial but unglamorous role, and that something is the stablecoin. Without a trustworthy on-chain dollar to use as a medium of exchange, every trade would involve swapping in and out of volatile tokens that often experience 10% moves in a day.

Yet the headlines that push stablecoins into the spotlight tend to trumpet new regulations, billion-dollar market caps, fresh exchange listings, and -- occasionally -- dramatic deviation from their intended fixed value (de-pegging) that leaves destruction in its wake. That can make them look like the next hot trade rather than the digital equivalent of the crumpled bills in a supermarket till.

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To decide whether they belong in your portfolio at all, it pays to separate their utilitarian purpose from their real but frequently misunderstood risks.

Image source: Getty Images.

When you hear about stablecoins, you're hearing about cash

At the simplest level, a stablecoin is a crypto token designed to track the price of a target fiat currency, -- usually the U.S. dollar -- so that people can send, store, and settle value on-chain without worrying about minute-by-minute price swings.

USDC (CRYPTO: USDC) is the poster child for this model, and the second largest of all stablecoins. Every token is said to be backed 1-for-1 by cash and short-term U.S. Treasury bills held by the issuer Circle, with independent attestations posted monthly.

Meanwhile, Circle's own valuation ballooned to roughly $60 billion as USDC's circulating supply hit $61.3 billion in June -- though the company now has a market cap of $46.2 billion, whereas its coin's value now is about $64 billion.

Tether's stablecoin, USDT (CRYPTO: USDT) -- the sector's biggest stablecoin with a market cap of $164 billion -- publishes daily snapshots that claim its reserves exceed liabilities, though critics note that the level of detail in its disclosures varies. And, in late 2024, Ripple USD (CRYPTO: RLUSD) entered the fray, pitched by Ripple Labs as an institutional investor-friendly alternative that lives on XRP's chain but is quickly finding retail takers, too.

Viewed through that lens, holding a stablecoin is less an investment than a convenience fee. You trade the rock-bottom risk of a bank deposit for the same amount of purchasing power embedded on 24/7 blockchain rails and near-instant transaction settlements.

If your goal is long-term capital appreciation, then assets like other cryptocurrencies or equities or even fairly conservative bonds will almost certainly do incalculably more heavy lifting. But if you routinely move funds between exchanges, stake in yield pools, or settle invoices with global partners, the ability to snap digital dollars across chains is invaluable.

These risks could turn utility into liability

Stablecoins are, at this point of their maturity as an asset, riskier than holding the equivalent amount of cash. For stablecoins, stability hinges on three pressure points that every investor should keep in mind.

First, there's asset issuer quality. Fully collateralized coins can break their peg if the issuer's reserves prove shakier than advertised or if they are frozen by regulators. If you're going to hold significant value in a stablecoin, read the attestation reports and audits, not the marketing copy. And check the price history for any evidence of past de-pegging.

Second, there are chain and bridge risks to consider. In the same vein, there are also interoperability risks or, more colloquially, the risk that the stablecoin you own is not compatible with the blockchain that you want to do business on.

As an example, a USDT stored on Ethereum is not the same asset as a USDT bridged to Solana, and moving between chains relies on third-party bridges that have been prime hacker targets, and which also tend to incur fees.

Developers are racing to build native cross-chain standards, but for now, every hop between chains introduces another potential point of failure. To be clear, this issue is common to many types of cryptocurrencies, but it's important to identify it specifically in the context of stablecoins because of the (incorrect) assumptions that investors often have about them due to their interchangeability with cash.

Third, not all pegs rely on holding old-fashioned cash -- much to the detriment of their holders. Algorithmic models in the past have attempted to hold parity through burn-and-mint mechanics, which reduce or add coins to the supply to maintain the $1 equilibrium point. But during times of market turmoil, rapid withdrawals can lead to oversupply and breaking the peg. Investors who mistake such structures for a boring digital dollar end up learning the hard way that complexity and leverage can masquerade as stability right up until they don't.

So where does that leave the long-term investor? Treat stablecoins as working capital, not high-yield savings. It's not a bad idea to diversify across at least two issuers, and favor tokens that publish frequent, detailed reserve attestations.

If you operate on multiple chains, consider maintaining the native version of a coin on each chain rather than relying on bridges.

Lastly, remember that new jurisdictions, from the U.S. Congress to Hong Kong's monetary authority, are rolling out licensing regimes that may well reshuffle the leaderboard of the top or best stablecoins in short order.

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Alex Carchidi has positions in Circle Internet Group. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.