Reserves and Arbitrage Keep Stablecoins Near $1

Stablecoins provide a low-volatility bridge between cryptocurrency markets and traditional payments. Reserve-backed tokens such as USDT, issued by Tether, and USDC, issued by Circle, target a price of $1 by holding assets including cash and short-term U.S. government securities. Eligible customers can typically create or redeem tokens at face value, giving each coin a claim anchored to assets outside the crypto market.

The latest explainer highlights arbitrage as the second core mechanism. If a stablecoin falls to $0.99, a trader could buy 1 million tokens for $990,000 and redeem them for $1 million; above $1, traders can create tokens at face value and sell them at a premium. The system depends on credible reserves and functioning redemption channels. On March 11, 2023, USDC briefly fell to about $0.87 after Circle disclosed that $3.3 billion was held at Silicon Valley Bank.