Understanding cryptocurrencies and stablecoins

The conceptualisation of digital currencies traces back to when David Chaum introduced eCash in the 1980s. Fast-forward three decades to when the modern era of cryptocurrencies was marked by the launch of Bitcoin in 2009. In 2025, cryptocurrencies have gained significant recognition and legitimacy as a means of storing and exchanging value.

As with any disruptive technology, it is important for prospective investors and users to develop a sound understanding of the differences, opportunities, and shortfalls that underpin it. This analysis provides an elementary overview of the differences between stablecoins and cryptocurrencies.

Definition and Purpose

Cryptocurrencies are digital assets operating on decentralized networks that are hosted on servers around the world. As of 2025, there are more than 22 000 cryptocurrencies being traded around the world. The intrinsic value of cryptocurrencies are determined by supply and demand factors, as well as overall market sentiment. Cryptocurrencies are primarily used for peer-to-peer transactions, investing, and as a store of value.

Stablecoins, a subset of cryptocurrencies, maintain a stable value that is pegged to an underlying asset, such as fiat currency, commodities, or other financial instruments. The purpose of stablecoins is to bridge the gap between traditional finance and crypto. These assets offer stability for payments, remittances, and have proven effective as a tool to hedge against volatility in broader financial markets.

Fundamental Differences

When developing an understanding of cryptocurrencies and stablecoins, it is important to be aware of these fundamental differences between stablecoins and cryptocurrencies:

1. Volatility and Price Stability

The legitimacy and value underpinning cryptocurrencies is largely based on market sentiment. Consequently, the value of cryptocurrencies is more volatile, as their value is more vulnerable to fluctuations in accordance with real-time market conditions. On the other hand, the innate value of stablecoins are pegged to that of real assets, which counter threats from market volatility and make these assets preferable for transacting.

2. Value backing mechanism

Unlike stablecoins, the value of cryptocurrencies is determined by supply and demand factors and prevailing market conditions. The value of cryptocurrencies is not backed by external assets. Conversely, the value of stablecoins are determined and insured by an underlying external asset - to which their value is directly linked.

Understanding the differences between cryptocurrencies and stablecoins is key for prospective investors, and merchants, when considering investment opportunities and the implementation of crypto as an alternate payment solution.

Risks and Challenges

Cryptocurrencies, which are valued in accordance with several market factors, present a more risky tool for investing and exchanging purposes. High market volatility, regulatory uncertainty, and security concerns pose a huge threat to the viability of these assets as tools in the financial ecosystem of today. Trust and regulatory concerns are central components limiting the usage of stablecoins in the modern financial landscape. Third-party reserves underpin the value of stablecoins, which raises transparency concerns.

While both stablecoins and cryptocurrencies share blockchain technology, their fundamental differences make them suited for different purposes. Cryptocurrencies offer decentralization, high return potential, and innovation but come with significant volatility risks. Stablecoins offer more stability, making them a practical choice for payments, trading, and financial security.

Whether you are an investor, trader, or business, understanding these differences can help you make informed decisions in the digital asset space.