A stablecoin is a cryptocurrency designed to hold a steady value, usually pegged to an official currency such as the dollar or the euro. Where bitcoin and ethereum fluctuate sharply, a stablecoin ideally tracks the currency it is tied to. For an investor, such a coin serves above all as a point of calm within the crypto market: a way to hold value temporarily without returning to a bank account each time.
Yet behind that simple description lies an important nuance. The stability of a stablecoin is conditional, and it depends entirely on what actually backs the coin. Anyone who understands what a stablecoin is therefore looks not at the promise, but at the collateral behind it.
What the stability is tied to
Broadly speaking there are three types. The most common is the fiat-backed stablecoin, where an issuer holds a reserve of cash and short-term government bonds for every coin in circulation. Tether’s USDT is the best-known example and also the largest by size. Alongside these are crypto-backed variants, collateralised by an excess of other cryptocurrencies. The third category is the algorithmic stablecoin, which maintains its peg not through reserves, but through an algorithm that steers supply and demand.
Why ‘stable’ is conditional
The link, known in the jargon as the peg, is a promise and not a law of nature. With fiat-backed coins that promise stands or falls on the quality of the reserves and on the ability to prove they exist. With algorithmic coins the risk is greater, as became clear in May 2022. That was when TerraUSD, an algorithmic stablecoin, lost its peg to the dollar. Its companion token Luna entered a downward spiral and became almost worthless, evaporating tens of billions in value. The episode showed that a coin called stable need not be stable under all circumstances.
Its place within European regulation
Since the introduction of MiCA, the European regulation for crypto-asset markets, the stablecoin has held a formal status. The regulation distinguishes two forms. An e-money token references the value of a single official currency, whereas an asset-referenced token references other assets, rights or a combination of these, including several currencies. Issuers must meet reserve and disclosure requirements, which strengthens protection without removing all risk. For those who wish to grasp the relationship between this framework and the Dutch fund regime, our comparison of MiCA and the AIFMD-light regime offers more context.
The Callisto Capital approach
For Callisto Capital, a stablecoin is an instrument with a risk profile of its own, not an end in itself; its value stands or falls on its backing. As a Dutch registered investment fund under the AIFMD-light regime, not subject to ongoing supervision by the AFM, we manage the portfolio according to fixed rules, with an emphasis on risk management, diversification and transparency. Participation is open from an investment of 100,000 euro.
This publication is informational only and does not constitute investment advice.
