Why Are So Many Stablecoins Failing? How Should Investors Choose the Right Stablecoin?
Introduction: The Risks and Opportunities of Stablecoins
Stablecoins are often considered the safe haven of the crypto market, shielding investors from extreme volatility. However, many low-liquidity stablecoins have collapsed, making it clear that not all stablecoins are secure. This article explores why many stablecoins fail and how investors can make informed choices to protect their capital.
Which Stablecoins Have Collapsed?
According to CoinMarketCap, as of June 17, 2025, there are 233 stablecoins with a total market cap exceeding $250 billion.USDT and USDC dominate the sector, accounting for85% of the market with a combined valuation of over $210 billion. The remaining stablecoins collectively hold only 15% of the market share.
- 4 stablecoins have a market cap between$10 billion and $100 billion.
- 15 stablecoins fall within the $1 billion to $10 billion range.
- The rest have less than $1 billion in market cap.
- Stablecoins ranked below #142 show no price, market cap, or trading volume data, suggesting they are illiquid or have effectively collapsed.
Incomplete data on stablecoins, source: CoinMarketCap.
Why Do Stablecoins Fail? 5 Key Reasons
Several factors contribute to stablecoin failures, including design flaws, insufficient reserves, regulatory risks, and market sell-offs. Here are the primary causes:
1. Algorithmic Design Flaws
- Some stablecoins rely on algorithmic mechanisms rather than real asset backing. When market confidence collapses, they lose their peg to the U.S. dollar, leading to price crashes — such asTerraUSD (UST).
2. Insufficient Reserve Assets
- Many stablecoins claim 1:1 USD backing, but their reserves often include commercial paper or corporate bonds, which carry risk. In2022,USDN lost its peg after its WAVES collateral plummeted.
3. Regulatory Crackdowns
- Governments may classify stablecoins as unregistered securities, forcing issuers to halt operations. Libra abandoned its launch due to regulatory pressure, while BUSD’s market cap plunged from $16 billion to below $1 billion after an SEC lawsuit in 2023.
4. Hacks & Smart Contract Vulnerabilities
- DeFi stablecoins rely on smart contracts, making them targets for hackers. In2022, Beanstalk Farms (BEAN) suffered a$180 million flash loan attack, causing BEAN to collapse.
5. Issuer Bankruptcy or Exit Scams
- Some stablecoins are issued by small firms or anonymous teams. If the issuer disappears or goes bankrupt, the stablecoin instantly loses value — such as BEAR, which became worthless after its issuer vanished.
How to Evaluate Stablecoin Safety?
Investors should assess reserve assets, regulatory compliance, liquidity, audits, and issuer credibility. Here are seven key evaluation criteria:
Criteria | Low Risk | Medium Risk | High Risk | How to Check |
Reserve Assets | Cash + Short-Term U.S. Treasuries (≥90%) | Mixed reserves (commercial paper, corporate bonds) | No sufficient reserves / algorithmic model | Review audit reports |
Issuer Credibility | Regulated entity, transparent team | Partially compliant, past controversies | Anonymous team / no regulatory oversight | Check company registration & regulatory fines |
Stability Mechanism | Fiat-backed / overcollateralized | Partial collateral + algorithmic adjustments | Pure algorithmic stablecoin | Read the whitepaper, verify collateral ratio |
Audit Transparency | Monthly third-party audits (Big Four firms) | Irregular audits / incomplete reports | No public audits | Check issuer’s transparency page |
Regulatory Compliance | Compliant with U.S./EU regulations | Partially compliant, restricted in some regions | Unregulated / facing lawsuits | Track SEC, FCA regulatory updates |
Historical Peg Stability | Never depegged or minor fluctuations (<1%) | Past depegging (1%-5%) | Multiple severe depegs or collapse | Review TradingView price history |
Liquidity | Daily trading volume > $1 billion | $100 million–$1 billion | < $100 million / only listed on small exchanges | Check CoinGecko / CoinMarketCap |
Which Stablecoins Should Investors Consider?
No stablecoin is perfect, and each has its own strengths and weaknesses. Investors should choose stablecoins based on investment goals and risk tolerance. Here are four reference options:
Stablecoin | Advantages | Disadvantages |
Tether (USDT) | Most widely used, high liquidity | Transparency concerns — reserve assets require scrutiny |
USD Coin (USDC) | High transparency, third-party audits | Lower market adoption compared to USDT |
Dai (DAI) | Decentralized, Ethereum-based, diverse collateral | Market volatility can impact stability |
TUSD | Real-time on-chain reserve verification, strong transparency | Smaller market share |
Conclusion
While stablecoins are considered safe assets in crypto, they still facereserve risks, algorithmic failures, and regulatory challenges. Investors should prioritize transparent, compliant, and highly liquid stablecoins, diversify holdings, and avoid relying on a single stablecoin to mitigate risks.
