Stablecoins promise cryptocurrency with a stable value. But they can’t always meet this ideal. Prices can drift and pegs can slip, especially amid market stress. The design choices behind each coin, including how it’s backed and how redemption works, shape how it behaves under pressure.

Below, we’ll break down whether stablecoins can increase in value, why and how stablecoins move, the underlying price mechanics, and what to look for when choosing a stablecoin to use or hold.

What’s in this article?

• Can stablecoins increase in value?
  
• What determines a stablecoin’s price?
  
• What causes stablecoin price deviations?
  
• How do stablecoins behave during market stress?
  
• What risks affect stablecoin price stability?
  
• How can users evaluate stablecoin price behavior?
  
• How Stripe Payments can help
  

Can stablecoins increase in value?

Though stablecoins can increase in value, they shouldn’t. Any increase is usually temporary and means something is malfunctioning.

A stablecoin is designed to have a stable value. Though some types are stabilized by algorithms or commodities, stablecoins are often pegged to fiat currency. Fiat-backed stablecoins are built to hold their peg, but in moments of stress or imbalance, they can briefly trade above it.

This can happen when:

• Demand surges: If traders buy trusted stablecoins during a market panic, prices can sharply increase before new supply meets that demand.

• Arbitrage lags: If redemptions or minting slow, prices on exchanges can drift upward.

• Confidence breaks elsewhere: When one stablecoin falters, traders might rush to buy others, sometimes pushing those above $1. When USD Coin (USDC) depegged during the Silicon Valley Bank (SVB) crisis, Tether (USDT) acquisitions climbed.

These price bumps are usually short-lived because arbitrage quickly brings the stablecoin’s value back to the peg.

What determines a stablecoin’s price?

A stablecoin isn’t inherently worth anything in particular. Instead, it’s designed to have a stable value (for most popular coins, $1 USD). This peg holds when people believe each coin can be swapped for the same amount in fiat.

User trust comes from these mechanics:

Reserves and redemption

When stablecoins are fiat-backed (e.g., USDC or USDT), their price stability comes from reserves and redemption. First, each coin must be backed by a reserve of cash or cash-like assets (such as short-term US Treasuries). Second, the stablecoin issuer must reliably redeem one coin for $1 on demand.

When both of these conditions are true and adherence to them is visible, holders can treat one coin as $1. If confidence in the reserves falters or redemptions slow, the price slips.

Arbitrage

When a fiat-backed stablecoin’s market price drifts, it starts a self-correcting arbitrage loop. For instance, if a coin starts trading at $0.98, traders will buy cheap and redeem for $1, which closes the gap. If the coin hits $1.02, traders instead redeem dollars and sell coins, which brings the price down. This works as long as the markets are functioning and redemption is one-to-one.

Crypto-collateralized stablecoins

Crypto-collateralized stablecoins, such as DAI, are backed by crypto such as Ether (ETH) and over-collateralized to handle volatility. If DAI trades above $1, users mint more; if it drops below, they buy it up to repay loans, which reduces supply. Smart contracts and onchain incentives keep the price in line. During big crypto swings, the peg can wobble, especially if collateral loses stability or redemptions slow.

Algorithmic stablecoins

Algorithmic stablecoins aren’t backed by reserves; instead, they adjust supply programmatically to hold the peg. This can work in calm markets, but there’s no real asset to rely on if confidence fades. TerraUSD, which collapsed in 2022, showed how quickly algorithmic stablecoins can unravel. Regulators are now abandoning the model: for example, the US GENIUS Act provides regulatory protections for stablecoin holders but excludes algorithmic stablecoins.

In short, stablecoin prices remain stable because markets believe they’re safe to redeem. When that belief cracks, the price (or the coin) follows.

What causes stablecoin price deviations?

Even the best-designed stablecoins can drift from $1. But this happens only when some part of the system is under stress.

Drivers tend to fall into one of three buckets:

Supply and demand gaps

Stablecoin prices change if markets get out of balance. This happens when:

• Volatility spikes: A rush on stablecoins (say, during a crypto crash) can push prices above $1 before new supply enters the market.

• Redemption is delayed: If it takes time to mint or redeem stablecoins (such as when networks are clogged), arbitrage lags and the peg can wobble.

• Liquidity shortages: When many stablecoin holders try to sell at once, the price can briefly dip until buying pressure returns.

Confidence shocks

Stablecoins rely on belief in their reserves. When this belief is tested, it can trigger chain reactions that depeg one or more currencies. Lack of transparency, rumors, or doubts about a partner bank can cause similar dips or premiums.

Technical problems

Outages, network congestion, or skewed liquidity pools can slow the mechanisms that normally hold a stablecoin’s peg in place.

How do stablecoins behave during market stress?

When markets shake, some stablecoins hold and others don’t. Over the past few years, specific coins have performed much better than others under pressure.

These incidents illustrate how different coins have responded to market stress:

March 2020: USDT surges

During the COVID-era crash, demand for some stablecoins surged, and USDT briefly traded above its peg on some exchanges. DAI also spiked above $1 after ETH, its collateral, plunged, and the system couldn’t mint new DAI fast enough to meet demand.

May 2022: TerraUSD collapses

In May 2022, the algorithmic stablecoin TerraUSD disintegrated. After confidence in its backing token, LUNA, slipped, its price plunged, which erased billions of dollars in value.

March 2023: The USDC banking scare

In March 2023, news broke that $3.3 billion of USDC’s reserves were stuck in the failed SVB. The market responded quickly: USDC’s price fell, and DAI, which was partly backed by USDC, dropped. Panicked traders ran toward USDT, which rose above $1. Once regulators guaranteed SVB deposits, USDC rebounded within 48 hours.

What risks affect stablecoin price stability?

When stablecoins lose their pegs, it means part of the process isn’t working correctly. Checking for risks ahead of time can prevent surprises.

Here are some weak spots to watch out for:

Low-liquidity reserves

Stablecoins backed by cash and short-term Treasuries can meet redemptions quickly. Those backed by long-dated assets, risky credit, or crypto might struggle during a rush. Remember: many stablecoin holders are also unsecured creditors without a regulatory backstop.

Weak or unclear governance

Without clarity and transparency, stablecoin issuers can quickly lose the market’s trust. Avoid issuers with unclear controls, vague reserve reports, or unaudited claims. The tighter the oversight and the clearer the disclosures, the stronger the price floor and the safer a stablecoin is for business use.

Regulatory shocks

If an issuer is sued or loses access to their banking system, redemption slows or halts. That sends the price off-peg. Even credible threats of enforcement action can prompt sell-offs, especially without a legal framework for guidance.

Functional friction

Outages, redemption queues, and delayed settlements all slow the correction process when the price drifts. The best-stabilized coins recover from these moments.

How can users evaluate stablecoin price behavior?

A stablecoin should behave like cash, even under pressure. Pegs hold when every layer of asset management—including reserves, redemption, and design—can absorb shocks without flinching.

Here are some questions to ask about each layer:

• Reserves: Is the stablecoin backed by cash and short-term Treasuries? Are the reserves audited? Monthly disclosures from regulated issuers build trust because they’re verifiable.

• Redemption: Who can redeem the coin, and how quickly? The faster and more accessible the redemption process, the more reliable the peg.

• Design: Has the design proved itself? Overcollateralized, battle-tested systems (such as DAI’s) hold up better than experimental models.

• Adoption: Is the coin popular? High usage across exchanges, blockchain ecosystems, and apps means tighter arbitrage and faster recovery if the price slips.

• History: Has the coin held its peg through real stress? A history of tight price bands is a strong signal, especially if it includes market upheaval.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world. Businesses can accept stablecoin payments from almost anywhere in the world that settle as fiat in their Stripe balance.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment user interfaces (UIs), access to 125+ payment methods, including stablecoins and crypto.

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Learn more about how Stripe Payments can power your online and in-person payments, or get started today.