Stablecoins: Are They Really Stable?

 

Throughout early 2025, the cryptocurrency market faced a significant downturn, driven by global economic uncertainty, shifting investor sentiment, and changing monetary policies. During these bear market periods, many investors panic, sometimes making hasty decisions that lead to losses. But did you know there’s a segment of the crypto ecosystem designed to maintain its value, even in turbulent times? Enter stablecoins.

What is stablecoin

Stablecoins are a unique type of cryptocurrency created to maintain a stable value over time. Unlike highly volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins are typically pegged to traditional assets like the US Dollar or commodities like gold. By anchoring their value to real-world assets, stablecoins help reduce the dramatic price swings that are common in the crypto market.

This stability makes stablecoins suitable for everyday transactions and financial operations. However, not all stablecoins are created equal. Their underlying structures vary, and some are more vulnerable to risks than others. For example, the algorithmic stablecoin UST collapsed in 2022 due to design flaws, leading to its rebranding as USTC.

What are the Benefits of Stablecoins?

Stablecoins have become an essential tool in the crypto ecosystem, offering several advantages:

• Reduced transaction fees: Many cryptocurrency exchanges skip fees for users who convert to or from stablecoins. So, instead of withdrawing money into U.S. dollars (and increasing the fee each time), traders can place their funds in stablecoins directly on the exchange. This allows them to wait out market declines or jump on rallies without losing any purchasing power in the process. 

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

• Passive income opportunities: Some stablecoins allow users to earn interest through staking or lending. For example, Coinbase is offering a 4.1 percent reward to users who hold USDC on the platform through March 2025.

What Are the Risks of Stablecoins?

Despite their advantages, stablecoins are not without risks. Here are the main areas of concern:

• Technology Risks

Stablecoins with a crypto or algorithm-based structure are controlled by smart contracts. Smart contracts are usually thoroughly audited, but there is still a risk of bugs or logical errors. If these weaknesses are exploited, they can cause the value of the stablecoin to be partially or completely lost. For example, Platypus Finance’s USP stablecoin suffered a major depeg after hackers exploited a smart contract flaw, resulting in significant losses for liquidity providers.

• Market and Economic Risks

Stablecoins are popular in the DeFi world for their perceived stability, but history has shown they can fail. The collapse of UST, an algorithmic stablecoin backed by the LUNA token, wiped out around $18 billion in investor funds. Even asset-backed stablecoins like USDC have faced challenges; in 2023, USDC temporarily lost its peg after the collapse of Silicon Valley Bank, which held part of its reserves.

• Regulatory Risks

A stablecoin’s legal vulnerability refers to changes in laws and regulations that could have a significant impact on an investment or business. In extreme cases, this could destroy the stablecoin issuer’s business model.

Tighter regulations can increase operating costs, reduce investment attractiveness, or change competition in certain sectors. Stablecoin issuers need to be prepared to adapt to an ever-changing regulatory environment.

Are Stablecoin Halal?

For Muslim investors, the question of whether stablecoins are halal (permissible) is important. Stablecoins can be considered halal if they meet certain Shariah criteria:

1. Permissible if assets or any RWA backs the stablecoins. If it is not 100% backed by any of those, then the ratio should be disclosed. 
2. The backing assets should be Shariah-compliant (e.g., not involving prohibited industries).
3. The holder should have the right to redeem the stablecoin for the underlying asset.

However, using stablecoins for speculative trading or gambling-like activities would not be Shariah-compliant. The permissibility depends on both the structure of the stablecoin and how it is used. 

At Sharlife, we offer a new product that helps users check the Shariah status of stablecoins and provides detailed analysis to ensure compliance.

Conclusion

Stablecoins offer a way to participate in the crypto ecosystem without being exposed to extreme price volatility. However, not all stablecoins are equally safe—their reliability depends on their structure and what backs them. While diversification is important, most investors may be best served by sticking with the largest and most transparent stablecoins, such as USDT and USDC, which are backed by real-world assets and have a strong track record.