2.5 Common Misconceptions
What You'll Learn: Why different dollar-backed stablecoins carry different risks despite seeming identical. How stablecoins actually fluctuate in value and when these movements matter. What protection exists through regulation and what gaps remain compared to traditional banking.
Now that you understand the technical architecture of stablecoins—their actors, stability mechanisms, lifecycle, and reserves—let's clear up common misunderstandings that persist even among regular users. Getting these fundamentals right is essential before we explore why stablecoins matter in the real world.
Now that you understand how stablecoins work, let's clear up the misconceptions that persist even among regular users. Getting these fundamentals right matters for real decisions: which stablecoin to hold, whether to trust them with savings, or if they're legal to use.
Consider Maria from Argentina, who converts her salary to stablecoins to protect against inflation. She might assume all dollar-backed stablecoins offer equal protection. Or Jose from the Philippines, who sends money home using stablecoins and worries they operate in a complete regulatory vacuum. Both have fallen for common misconceptions that can lead to poor decisions.
Common Beliefs vs Reality
"All dollar stablecoins are the same"
Different companies, different risks
"They always equal exactly $1.00"
Usually $1.00, sometimes $0.99-$1.01
"Mainly used for buying coffee"
Mostly used for trading and savings
"Completely unregulated wild west"
Licensed and monitored in most countries
"Dollar backing means zero risk"
Banking and operational risks still exist
Let's examine each misconception in detail.
1. "All dollar-backed stablecoins are the same"
The Myth: If two stablecoins are both backed by U.S. dollars, they're essentially identical and equally safe to hold.
Why It Seems True: They all promise one token equals one dollar. Major stablecoins like USDT and USDC look the same in your wallet and work the same when trading. Why would one be different from another?
The Reality: Think of it like assuming all banks are equally safe because they all hold dollars. Just as banks can fail despite holding real money (remember Silicon Valley Bank in 2023?), stablecoins backed by dollars have different risk levels depending on where those dollars are kept and who manages them.
As we saw in Section 2.1, different issuers operate with vastly different approaches. Circle partners with BlackRock and Bank of New York Mellon as custodians, while publishing monthly reports verified by top accounting firms [1]. Tether uses different banking relationships and has historically been less transparent, though it has improved recently.
The March 2023 crisis proved this point dramatically. When Silicon Valley Bank collapsed, USDC dropped to $0.87 because Circle had $3.3 billion trapped in that bank [2]. Meanwhile, USDT actually traded above $1 as traders fled to what they perceived as safer. Two dollar-backed stablecoins, completely different outcomes.
What This Means for You: Check which stablecoin your exchange uses and understand its specific setup. Look at where they keep the dollars (banks versus Treasury bills), how often they prove they have them (monthly reports versus quarterly), and who's behind the company. Some are genuinely safer than others.
2. "Stablecoins always equal exactly one dollar"
The Myth: A stablecoin maintains perfect $1.00 value at all times, never varying even by a penny.
Why It Seems True: They're called "stable" coins, and their whole purpose is maintaining dollar parity. Marketing materials emphasize the one-to-one backing.
The Reality: Stablecoins aim for $1.00 but often trade at $0.99 or $1.01, like how gas prices vary between stations even though they're all selling the same gallon. These small wobbles are normal market behavior.
Remember those arbitrageurs from Section 2.1? They actually need these price differences to function. When USDT drops to $0.998, they buy it cheap and redeem for exactly $1.00, pocketing the difference. This buying pressure pushes the price back up. Without these small variations, the stability mechanism wouldn't work.
Data from 2023 shows stablecoins depegged over 600 times, though most variations were tiny, under 1% [3]. Think of it like your car's cruise control: it targets 60 mph but might fluctuate between 58-62 mph on hills. The system works as long as it returns to target quickly.
Major departures are rare but memorable. USDC's drop to $0.87 during the Silicon Valley Bank crisis recovered within 72 hours once the Federal Reserve guaranteed deposits [4]. Even Tether has traded as low as $0.88 during past crises before recovering. These events test the system but haven't broken it.
What This Means for You: Small variations (99 cents to $1.01) are the market working normally. If you see larger swings (below 95 cents or above $1.05), something significant is happening and you should pay attention. For everyday use, these wobbles won't affect you. For large holdings during a crisis, they might matter.
3. "Stablecoins are mainly for buying coffee"
The Myth: People primarily use stablecoins as digital cash for everyday purchases, like buying coffee or paying for online shopping.
Why It Seems True: The word "coins" suggests money for spending, and early cryptocurrency advocates promoted digital payments as the future. Media coverage often focuses on payment use cases.
The Reality: Stablecoins function more like digital dollars in a trading account than spending money in your wallet. Over 90% of stablecoin activity happens on exchanges for trading, not for buying goods and services [5].
Look at the actual users we described in Section 2.1. Mei-Lin the Hong Kong trader parks profits in USDT between trades. Marcus the Berlin developer uses DAI for leveraged DeFi positions. Jennifer the San Francisco treasurer processes B2B payments. Carlos the Buenos Aires developer saves his salary to escape inflation. None are buying coffee.
PayPal launched PYUSD specifically for payments in 2023, backed by one of the world's largest payment networks. It reached only $400 million in total value, tiny compared to USDT's $150 billion. Even with perfect payment infrastructure, demand for stablecoin shopping remains limited in developed countries.
Usage varies dramatically by location though. In Latin America, where inflation can exceed 200%, people use stablecoins to preserve savings [6]. In the Philippines, overseas workers use them to send money home cheaply. In Nigeria, businesses use them when local currency is scarce [7]. Context determines use case.
What This Means for You: In developed countries with stable banking, you'll likely use stablecoins for trading or international transfers, not daily purchases. In countries with high inflation or limited banking, stablecoins might become your primary way to save and transfer value. Know your local context.
4. "Stablecoins are completely unregulated"
The Myth: Stablecoins operate in a legal gray area or complete regulatory vacuum with no oversight or rules.
Why It Seems True: Cryptocurrency started as an alternative to traditional finance, and news often emphasizes the "wild west" aspects. The lack of unified global standards reinforces this perception.
The Reality: Major stablecoin issuers face heavy regulation, just not always in ways you'd expect. Circle holds money transmission licenses in 46 U.S. states, the same licenses PayPal needs [7]. The European Union implemented comprehensive stablecoin rules in 2024 [9]. The U.S. Senate passed stablecoin legislation in 2025 [8].
Think of it like food trucks versus restaurants. Food trucks follow different rules than sit-down restaurants, but both have health inspections, licenses, and standards. Similarly, stablecoins follow different rules than banks but still have oversight.
The enforcement is real. Tether paid $41 million in fines to U.S. regulators for misrepresenting reserves. European exchanges had to delist certain stablecoins in January 2025 for not meeting new requirements [9]. When we discussed regulators as key actors in Section 2.1, we meant active supervisors, not passive observers.
The new GENIUS Act even specifies exactly what can back stablecoins: cash, insured deposits, and short-term government securities. No commercial paper, no corporate bonds, no creative accounting. Monthly reports must be certified by the CEO personally. This isn't light-touch regulation.
What This Means for You: You have more protection than you might think, but less than with traditional banks. Stablecoin issuers must follow anti-money laundering rules, maintain reserves, and submit to examinations. However, you don't get deposit insurance like bank accounts. Know what protection exists and what doesn't.
5. "If it's backed by dollars, it can't fail"
The Myth: As long as a stablecoin has full dollar backing in reserves, it's completely safe and immune to failure.
Why It Seems True: If every token has a real dollar behind it, simple logic suggests you can always get your dollar back. Full backing sounds like perfect protection.
The Reality: Think of it like having gold bars in a safe. The gold exists, but what if you lose the key? Or the safe is in a building that burns down? Or the company managing the safe goes bankrupt? The backing matters, but so does everything else around it.
The March 2023 USDC crisis perfectly illustrates this. Circle had full backing with real dollars in real banks. But when Silicon Valley Bank failed, $3.3 billion of those real dollars became temporarily inaccessible [10]. USDC dropped to $0.87 despite being fully backed because people couldn't be sure when they'd access those reserves.
The mint-burn process we covered in Section 2.3 adds another layer of risk. Even with perfect reserves, technical problems could prevent redemptions. The two-tier system means institutional traders can redeem directly while retail users depend on exchanges. If exchanges freeze withdrawals, your fully-backed tokens become stuck.
Other risks exist beyond banking failures. Regulatory action could freeze assets. Cyberattacks could compromise operations. During extreme market stress, even fully-backed stablecoins might struggle to process massive redemption requests quickly enough.
What This Means for You: Full backing is necessary but not sufficient for safety. Also consider where reserves are held (diversified across multiple banks?), how quickly you can redeem (instant or days?), what happens if the company fails (are reserves legally protected?), and whether the issuer has survived previous crises.
6. "Too complicated for regular people"
The Myth: You need to understand blockchain, cryptography, and programming to use stablecoins safely.
Why It Seems True: Early cryptocurrency required command-line interfaces, managing cryptographic keys, and understanding technical concepts. Media coverage emphasizes the technology rather than the user experience.
The Reality: Modern stablecoin apps are simpler than online banking. You don't understand TCP/IP but use the internet. You don't understand SWIFT but send wire transfers. The complexity is hidden behind user-friendly interfaces.
In Argentina, taxi drivers accept USDT through simple phone apps. Filipino domestic workers send money home through interfaces simpler than Venmo. Nigerian market vendors price goods in stablecoins using basic calculators. These aren't tech experts solving complex problems.
The technical complexity exists at the infrastructure level. Smart contracts govern DAI, attestation firms verify reserves, arbitrageurs maintain price stability. But users just see "buy" and "sell" buttons. As we showed in Section 2.3, retail users can't even access direct minting. They buy pre-minted tokens from exchanges, never touching the complex machinery underneath.
What This Means for You: Start with user-friendly platforms like Coinbase or PayPal's PYUSD. The experience feels familiar: create account, add funds, send money. Focus on understanding practical basics (which stablecoin, what backs it, how to buy it) rather than technical details. The blockchain complexity matters as much as email protocols do for sending messages.
Moving Forward with Clear Understanding
These misconceptions share a common thread: oversimplifying complex systems. Stablecoins aren't just "digital dollars" any more than email is just "digital mail." They're tools with specific characteristics, benefits, and risks.
Now that you understand both how stablecoins work and what's actually true about them, you can make informed decisions. They're neither magical internet money that solves all problems nor dangerous instruments destined to fail. They're practical tools that millions use daily for specific purposes.
With this complete technical foundation and myth-free understanding, we can examine why stablecoins matter in the real world. The next section explores practical implications for individuals, businesses, policymakers, and investors, showing how this $200 billion market processing $27 trillion annually affects different stakeholders.
Key Takeaways:
Different issuers mean different risks even with identical dollar backing (USDC versus USDT showed this in March 2023)
Price variations are normal and necessary for arbitrage to maintain stability
Trading and savings dominate usage, not retail payments (90% happens on exchanges)
Major issuers are licensed and regulated, though differently than banks
Full backing doesn't guarantee safety without proper custody, operations, and access
References
[1] Transparency & stability - https://www.circle.com/transparency
[2] Stablecoin USDC breaks dollar peg after firm reveals it has $3.3 billion in SVB exposure - https://www.cnbc.com/2023/03/11/stablecoin-usdc-breaks-dollar-peg-after-firm-reveals-it-has-3point3-billion-in-svb-exposure.html
[3] Moody's reports 600 stablecoin depegs in 2023 - https://protos.com/moodys-reports-600-stablecoin-depegs-in-2023/
[4] USDC Stablecoin Regains Dollar Peg After Silicon Valley Bank-Induced Chaos - https://www.coindesk.com/business/2023/03/13/usdc-stablecoin-regains-dollar-peg-after-silicon-valley-bank-induced-chaos
[5] Stablecoins' role in crypto and beyond: functions, risks and policy - https://www.ecb.europa.eu/press/financial-stability-publications/macroprudential-bulletin/html/ecb.mpbu202207_2~836f682ed7.en.html
[6] 2024 LATAM Crypto Adoption: The Rise of Stablecoins - https://www.chainalysis.com/blog/2024-latin-america-crypto-adoption/
[7] Stablecoins 101: Behind crypto's most popular asset - https://www.chainalysis.com/blog/stablecoins-most-popular-asset/
[8] US Senate passes stablecoin bill in milestone for crypto industry - https://www.reuters.com/sustainability/boards-policy-regulation/us-senate-passes-stablecoin-bill-milestone-crypto-industry-2025-06-17/
[9] Stablecoin Adoption Amid New Rules - https://research.kaiko.com/insights/stablecoin-adoption-amid-new-rules
[10] Stablecoins: A Deep Dive into Valuation and Depegging - https://www.spglobal.com/en/research-insights/special-reports/stablecoins-a-deep-dive-into-valuation-and-depegging
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