Stablecoins: a beginner's guide
How stablecoins work and how to invest indirectly in the stablecoin ecosystem
👋🏼 everyone,
It’s been a minute, but back to business! After posting onto my own separate website for the past 6 months I’ve decided to move back to Substack. So hello again - it’s great to be back.
This week I want to cover Stablecoins - often talked about, rarely explained.
Just this past month we've seen the US pass its first national law to regulate stablecoins, Hong Kong launch strict new licensing rules for stablecoin issuers, and major global payment companies begin integrating stablecoins into their systems.
If you’re searching for heart-stopping volatility, stablecoins probably aren’t going to be your thing. But if you want to park your funds safely, hedge against crazy price swings, or actually use crypto for payments people can trust, you’d be hard-pressed to find anything better. Boring? Maybe. Necessary? Absolutely.
Today I’m going to cover:
What’s a stablecoin, anyway?
Why bother with stablecoins?
A real-world example that hits home 🌍
Sneaky ways to invest in a potential stablecoin boom without buying them
Must-know terminology
Stablecoins in 90 seconds - 📹 explainer
The biggest stablecoins today: who’s dominating the market?
Your step-by-step playbook: how to buy stablecoins 📋
Let’s get into it.
What exactly is a Stablecoin? A simple explanation
A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a reference asset, typically a fiat currency like the US dollar.
In this sense, stablecoins are different to other cryptocurrencies because they’re far less volatile.
The two key characteristics of stablecoins are:
First, stability. Stablecoins are described as stable for a reason - and they aim to minimize price volatility compared to other cryptocurrencies.
Second, they’re pegged to an asset.
A stablecoin can be pegged to any number of different assets but by far the most popular asset for stablecoins to be pegged to is the US dollar.
Why even think about purchasing stablecoins?
OK, so the key reason someone might want to buy stablecoins is they’re not about chasing moonshot gains but securing rock-solid utility.
Pegged 1:1 to the dollar, many claim they’re safer than bank deposits that risk vanishing in a crisis.
Beyond this, stablecoins operate on blockchain networks, enabling faster, borderless transactions without intermediaries like banks, which often impose fees or delays. For example, sending dollars internationally via traditional banking can take days and incur high costs, whereas stablecoin transfers, like USDT or USDC, can settle in minutes with minimal fees.
Real 🌎 example
In Bolivia, the economy’s been hit hard. A severe U.S. dollar shortage has left banks empty, with the government tightly controlling the little USD available.
Hyperinflation is eating away at the boliviano’s value, and a parallel exchange rate - more than double the official one - has emerged on the streets. Importers struggle, online shopping’s nearly impossible, and debit or credit card use abroad is capped at $100 a month. It’s a mess, and the government isn’t rushing to fix it.
Enter stablecoins. For Bolivians, they’re a game-changer. Here’s how they’re helping:
Preserving savings: with the boliviano’s value plummeting, stablecoins act as a safe haven, holding steady while local currency tanks.
Bypassing restrictions: freelancers or workers paid in USD from abroad can’t rely on banks, which either withhold funds or convert them at unfair rates. Peer-to-peer crypto platforms let users swap dollars for stablecoins and then into bolivianos at rates closer to the parallel market, saving them from massive losses.
Freedom to spend: stablecoin-backed debit cards let people shop online or spend abroad without the $100 cap, giving them flexibility the traditional system denies.
Empowering control: stablecoins cut out middlemen, letting Bolivians use their money how they want, when they want, despite a dysfunctional economy.
In short, stablecoins are more than just crypto - they’re a tool for, in this case Bolivians, to navigate hyperinflation, dodge government restrictions, and keep their financial freedom intact.
How to indirectly invest in the stablecoin ecosystem
If you’re looking to indirectly invest in the stablecoin ecosystem and potentially benefit from their growth, then there are some options worth knowing about.
One way is to look into companies or platforms that issue or heavily rely on stablecoins. You could invest in publicly traded companies tied to the crypto space, like Coinbase or other exchanges that facilitate stablecoin trading. These platforms make money from transaction fees, and since stablecoins are a huge part of crypto trading volume, their success can indirectly tie to stablecoin usage. For example, you might buy shares in a company like Coinbase through a brokerage account. It’s a way to bet on the infrastructure supporting stablecoins without directly holding them.
Another option is to explore decentralized finance, or DeFi, protocols that use stablecoins. You could stake or lend assets on platforms like Aave or Compound, where stablecoins are often used as collateral or for earning interest. By supplying liquidity or lending, you’re earning yields from the stablecoin ecosystem without betting on their price going up. You’ll need to get comfy with a crypto wallet and do some research on the risks, like smart contract vulnerabilities.
Lastly, you could consider investing in blockchain projects or companies building the tech behind stablecoins, like Circle, which issues USDC. If they’re publicly traded or have a token, you might buy into their equity or governance tokens through crypto exchanges. This way, you’re supporting the backbone of stablecoins and could benefit if their adoption grows. Just make sure to check the project’s fundamentals and market trends.
Key terminology to know
📹 Stablecoins explained…in 90 seconds
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Top stablecoins coins today by market cap
Step-by-step guide on how to buy a stablecoin 📋
Pick a reputable crypto exchange
First things first, you’ll need a platform to buy your stablecoin. Think of it like choosing a bank or an online broker, but for crypto.
For 🇺🇸 folks, some solid options are Coinbase, Kraken or Binance (my personal favorite). These are user-friendly, regulated in the U.S., and have good reputations.
Sign-up and verify your identity
Once you’ve picked an exchange, you’ll need to create an account. This is like signing up for any online service, so things like email, password, the usual. But because of U.S. regulations (to prevent money laundering and such), you’ll also need to verify your identity. This usually means:
Providing your full name, address, and date of birth.
Uploading a photo of a government-issued ID (like a driver’s license or passport).
Sometimes, submitting a selfie or proof of address (like a utility bill).
This can take a few minutes to a few days, depending on the exchange. Coinbase is usually pretty quick, but Kraken might take a bit longer for full verification.
Fund your account
Now that you’re verified, it’s time to add some money to your account. Most exchanges let you deposit U.S. dollars (USD) via:
Bank transfer (ACH): This is free or low-cost but might take 1-5 business days.
Debit card: Faster (often instant), but you might pay a 2-4% fee.
Wire transfer: Good for larger amounts, but some banks charge for this.
Log into your exchange, find the “Deposit” or “Fund” section, and follow the prompts to link your bank account or card. For example, on Coinbase, you’ll see a big “Add Payment Method” button. Once your funds are in, you’ll see a USD balance in your account.
Buy Your Stablecoin
With money in your account, you’re ready to buy. Go to the trading or buying section of the exchange. Look for the stablecoin you want e.g. USDC and USDT (Tether) are the most common, and both are pegged 1:1 to the USD, so 1 USDC = $1 (minus tiny fees). Here’s how it usually goes:
Select the stablecoin (e.g., USDC).
Choose how much you want to buy (e.g., $100 worth).
Confirm the transaction. You’ll see a preview of any fees (usually small, like 0.5-2%).
On Coinbase, it’s as simple as clicking “Buy/Sell,” picking USDC, and entering your amount. Kraken might have you choose a trading pair like USDC/USD. The stablecoin will show up in your exchange wallet almost instantly.
Store Your Stablecoin Safely
Congrats, you own stablecoin. It’s sitting in your exchange wallet, but you’ve got options for where to keep it:
Leave it on the exchange: Fine for small amounts or if you plan to trade soon. Just know exchanges can be hacked (though rare for big ones like Coinbase).
Move to a personal wallet: For extra security, transfer your stablecoin to a crypto wallet. Software wallets (like MetaMask) are free and easy for beginners. Hardware wallets (like Ledger or Trezor) are pricier but super secure for larger amounts.
To transfer, find the “Withdraw” or “Send” option on the exchange, paste your wallet’s address, and confirm. Double-check the address - crypto transactions are irreversible!
And DEFINITELY (!) enable two-factor authentication (2FA) on your exchange account. Use an authenticator app like Google Authenticator, not just SMS, for better security.
Understand Taxes and Regulations
The IRS treats crypto as property, so buying stablecoin itself isn’t taxable, but using it (like selling or spending) could trigger capital gains taxes. Keep records of your purchases (date, amount, fees) for tax season. Some exchanges like Coinbase provide tax reports, which is handy.
Also, U.S. exchanges comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, so don’t be surprised if they ask for extra info if you’re moving large amounts.
Explore What’s Next
Now that you’ve got stablecoin, you can:
Hold it as a stable store of value.
Use it in decentralized finance (DeFi) apps to earn interest (check out platforms like Aave or Compound, but do your homework, DeFi can be very risky).
Spend it where crypto is accepted (some online stores take USDC).
Trade it for other cryptocurrencies on the exchange.
I really hope this was a helpful intro to the world of stablecoins.
Thanks!
Jason
DISCLAIMER: None of this is financial advice. The Finbrain newsletter is strictly for educational purposes. AI tools can hallucinate and are not a replacement for financial advice.