Do Stablecoins Change in Value? Understanding Price Stability and Risks

Introduced to the world in 2014, when crypto-backed BitUSD was launched, stablecoins are now an integral part of digital asset markets, payment infrastructure and cross-border settlements. Increasing numbers of financial institutions – from traditional banks to fintech brands – are using them to enable faster, seamless settlements between fiat and digital assets. One of stablecoins’ main advantages is their relatively higher stability compared to other crypto assets – hence the “stable” moniker – although this comes with some important caveats.

This article will offer a technical overview of how stablecoin prices work and why they can change.

What is a stablecoin? 

A stablecoin is a type of digital asset the value of which is usually pegged to another asset, often a fiat currency such as the US dollar. Some stablecoins may be pegged to other fiat currencies or even commodities such as gold. 

Linguistically, the term ‘stablecoin’ suggests stability and low risk. However, while these assets are designed to maintain a stable value, they are not guaranteed to do so in all market conditions. The pricing stability of stablecoins is influenced by numerous factors such as market confidence, operational resilience and liquidity, which we will explain in more detail later. 

How are stablecoins used?

Stablecoins can be used to make digital payments, often for buying or selling crypto assets or making cross-border payments. Institutions also use them to reduce their liquidity risks and to improve the efficiency of on- and off-ramps between fiat and crypto.

Compared to traditional or unbacked crypto assets like Bitcoin, they are typically less volatile and more predictable in normal market conditions, which reflects their design and supporting reserve mechanisms.

Why are stablecoins designed to be less volatile than crypto currencies?

Pegging a stablecoin to a reference asset is intended to result in much more price stability compared to unbacked crypto assets. However, the extent to which a stablecoin will remain pegged to this asset will also depend on how the reserves are managed, how quickly users can make redemptions, and market sentiment. The pricing behaviour of a stablecoin is not dictated by this alone; it is influenced by a broad range of market, operational and governance factors.

This reduces the risk of a sudden loss in value compared to more volatile crypto assets, which makes stablecoins more suitable for transactional and treasury use cases. However, this design also limits stablecoins’ exposure to the kind of price appreciation that can quickly occur with other crypto assets. For this reason, stablecoins have become very popular among businesses that are adopting and scaling digital assets but want to reduce their exposure to market volatility.

Is stablecoin similar to cash?

Stablecoins are sometimes described as the digital or crypto equivalent of cash. However, this isn’t an entirely accurate comparison – a closer one would be the traveller’s cheque,

Unlike traditional cash, which is issued by central banks, such as the Bank of England, and is supported by sophisticated monetary and legal policies, stablecoins are usually issued by private sector organisations. This means there are no institutional guarantees, which is perhaps the most important differentiator.

The stablecoin market

The stablecoin market has grown exponentially in the last few years. For example, the International Monetary Fund (IMF) reported that trading volume rose rapidly between 2023 and 2025 – much of this flowing from North America to international regions.

By market capitalisation, the largest stablecoins include Tether and USDC, both of which account for a significant share of the market. They are followed by smaller but widely used alternatives such as DAI and USDS. As at December 2025, Tether and USDC had a market capitalisation of nearly £200 billion collectively. This demonstrates that stablecoins are already embedded in institutional trading, settlement and liquidity management.

Do stablecoins change in value?

Stablecoins can change in value and may be sensitive to market events – but it’s important to add some context.

What happens during normal market conditions?

You should expect the price movements of stablecoins to be relatively small and closely aligned to their target value. Any changes will usually reflect temporary imbalances between supply and demand, which should be quickly corrected. 

What happens during adverse events?

During market stress, stablecoins can deviate from their target value, especially if there are concerns about their reserves, redemption capacity or governance.

Why are small price movements important?

When compared to other crypto assets, the price movements you see with stablecoins may appear to be insignificant: deviations from the target price are often short-lived and may represent a fraction of one percent.

However, as stablecoins become increasingly institutionalised and more embedded in the financial system, these small fluctuations will have a bigger impact – especially for time-sensitive and high-volume transactions. This is why it’s essential to monitor stablecoin activity continuously, especially for institutions that are beginning to use them at scale.

What factors influence stablecoin price stability?

Operational resilience and governance

Any incidents related to governance, operations or security can dampen market confidence in stablecoins and make them less stable. Remember that asset backing alone does not guarantee price stability. Stablecoins also require effective governance and operational infrastructure to maintain market confidence and enable quick redemptions.

Market liquidity and arbitrage 

Stablecoins rely on being pegged to an underlying asset so users can quickly redeem them at a price that is equal to or close to the stated value (“par value”). When liquidity is highly constrained, small sell orders can rapidly overwhelm available bids, forcing prices to diverge from target prices for longer periods than usual.

Reserve assets

Stablecoins that are backed by highly liquid, relatively lower risk assets are less vulnerable to price volatility during market stress, such as a recession. The US dollar, unsurprisingly, is the most common reserve for stablecoins, thanks to its very high liquidity. Many stablecoins are backed by US Treasuries, which are the world’s largest and most liquid government bonds and are widely used to finance the US government.

Other external market factors

When there is uncertainty or a market shock, stablecoins may become less stable if users want to transfer higher levels of their assets to cash than usual.

Issuance and redemption

Maintaining stablecoin price stability depends on the ability to redeem at scale and within fast settlement times. When this is restricted, market pricing can become much more sensitive to acute demand shocks from an unexpected event.

Stablecoins and risk

Financial risks of stablecoins

• Liquidity risk

When trading activity falls because a higher number of users than usual withdraw from the market, this can raise the liquidity risk of stablecoins and move prices away from the peg.  

• Redemption risk

As we mentioned earlier, stablecoin prices can become volatile if users are unable to redeem their tokens quickly. Some market participants may also be disproportionately impacted by a sudden increase in minimum threshold requirements or higher eligibility requirements.

• Reserve risk 

When the composition of a stablecoin’s reserve assets changes, this can also impact its price stability.

For example, volatility may increase if reserves are redistributed towards less-liquid assets that can quickly lose value during periods of market stress. 

Other financial risks

Like other financial instruments, stablecoins can also be subject to counterparty risks if there is a failure involving a reserve custodian, bank or an issuer or administrator.

These failures can have a rapid chain reaction, which can have significant implications for price stability. Interest rate changes can also affect the valuation of reserves, which may have a knock-on effect on the pricing mechanism of the stablecoin.

Operational risks of stablecoins

• Technology and infrastructure

Failures involving technical systems like blockchain networks or cybersecurity can disrupt settlements and redemptions and undermine market confidence in the stablecoin – even if it has a clear track record of performing well.

• Governance

The strength of a stablecoin’s governance structure will determine how it responds to market stress and other adverse events. If the governance is reactive – when risk mitigation and operational resilience are not embedded into the day-to-day operations – this raises the likelihood of reduced stability and price de-pegging.

• Compliance and operational dependency

If a stablecoin doesn’t meet any new regulatory requirements, or if there are any delays to new licensing or authorisations, this could reduce market confidence and indirectly impact liquidity and pricing. 

Furthermore, stablecoins are often reliant on specific providers and partners. Any incidents can lead to single points of failure, which could cause significant disruption to issuance, redemption and settlement.

Regulatory risks of stablecoins

Stablecoins could be impacted by new regulatory developments in various jurisdictions. For example:

• The UK is preparing to create a new sterling-denominated systemic stablecoin regime to make wholesale and retail payments cheaper.
• The GENIUS Act in the US aims to increase digital asset adoption by creating the first regulatory framework there that is specifically for stablecoins.
• A consortium of 10 European banks is also planning to launch a euro-backed stablecoin to strengthen Europe’s role in the digital payment sector.

These regulatory developments could have significant implications for how stablecoins function but could also offer important guardrails for institutions looking to adopt and scale them. For example, any restrictions on activities could reduce the liquidity and availability of these assets, which could increase volatility. Issuance models could also be affected by any new reserve mandates, while new licensing requirements could also affect the pricing and stability of these assets.

However, new regulatory frameworks also provide much-needed clarity to institutions that might have chosen to expand their digital assets exposure in a more measured way. They set minimum standards and can make it easier for institutions to begin integrating stablecoins into their existing risk management and governance frameworks.

Stablecoin risk analysis and management 

Stablecoins are designed to be stable but should not be interpreted as a guaranteed ‘safe haven’. Instead, they should be treated as financial instruments that need to be managed as part of a broader risk framework. They can still be vulnerable to market volatility, which is why it’s important to perform detailed assessments and ongoing monitoring.

Key considerations when assessing stablecoins:

Examine historic prices

While a stablecoin might be performing well today, the historical pricing behaviour might show a very different picture. Look at how it has performed during periods of market stress – such as the start of the Covid-19 pandemic in early 2020 or the Russian invasion of Ukraine in early 2022. Look out for any sharp deviations from the peg, analyse how long these deviations lasted and confirm when the stablecoin returned to the peg price.

Diversify your stablecoins

Concentrating on just one stablecoin can raise your exposure to any issue-specific volatility or operational incidents. Diversifying with multiple, regulated stablecoins can help you benefit from more price stability, which doesn’t eliminate risks but helps to reduce them.

Understand the redemption terms

The ability to redeem stablecoins quickly and at scale is essential for maintaining price stability. This is why institutions should review redemption eligibility, determine what the minimum thresholds and settlement timelines are, and understand any other conditions that could delay or suspend redemptions so they can develop contingency plans.

Conduct regular independent audits

Detailed audits can help you identify any unusual behaviour patterns or discrepancies. For example, it is important to check that the stablecoin’s reserve composition is exactly what is claimed and is in line with any disclosed policies. 

Incorporate stablecoins into your broader risk management

The risk profile of stablecoins can change over time, so monitor price behaviour, liquidity, regulatory changes and issuer disclosures closely. These types of risk assessments should never be seen as a ‘finished job’ but rather an ongoing process that requires regular refinement.

This is also why it’s important to assess stablecoins in line with other payment, settlement and treasury instruments. Embedding your stablecoin exposure into your risk management and governance frameworks can also help you proactively identify any emerging risks as market conditions change or regulations evolve.

Implications for institutional adoption

Stablecoins can be valuable for institutions looking to adopt and scale digital assets while reducing their exposure to the volatility of traditional cryptocurrencies. However, it’s worth remembering that they are intended to be stable by design but are not immune to volatility. While stablecoins are meant to be pegged to their target price, their prices can still change significantly in response to various market, financial and operational risks – although usually not to the same degree as cryptocurrencies. 

The long-term success of stablecoins and their ongoing institutional adoption will depend on how effective they are at achieving what they are intended to do: to maintain price stability and enable seamless cross-border settlements. Rather than treating them like a digital cash equivalent, institutions should see them as valuable financial instruments that can help them integrate their payments, settlement and treasury infrastructure.