Bitcoin, Other Cryptocurrencies and Stablecoins

What you will learn

• How other cryptocurrencies differ from Bitcoin
• What stablecoins are and how they try to hold their value
• What a depeg is and why it matters
• Why owning many coins is not the same as diversification

Explanation

Thousands of other crypto-assets exist. They are often called altcoins (alternative coins). Some run their own networks with different rules, for example smart contract platforms. A smart contract is a program that runs on a blockchain. Tokens are assets created on top of an existing blockchain.

Differences that matter for risk: who created the project and who holds most of the supply, whether the rules can be changed easily by a small group, how much real trading exists, and how long the project has existed. Many tokens have lost almost all of their value or disappeared completely.

A stablecoin is a token designed to keep a stable value, usually 1 US dollar or 1 euro. Main types:

• Reserve-backed: the issuer holds cash and short-term assets. Under MiCA, tokens referenced to one official currency are called e-money tokens (EMTs); tokens referenced to other assets or baskets are asset-referenced tokens (ARTs). Issuers in the EU need authorisation.
• Crypto-backed: backed by other crypto, usually with extra collateral.
• Algorithmic: try to hold the price with code and incentives. The TerraUSD stablecoin lost its peg and collapsed in May 2022, causing very large losses.

A depeg is when a stablecoin trades clearly away from its target value. Even reserve-backed coins can depeg: in March 2023, USD Coin briefly fell well below 1 dollar after part of its reserves was held at a failing US bank. Stablecoins also carry issuer risk, platform risk and currency risk: a dollar stablecoin changes in euro value when the exchange rate moves.

Concentration risk means having too much exposure to one thing. Crypto-assets often fall together in market stress, so holding ten coins is still one concentrated bet on crypto. This lesson does not recommend any coin.

Worked example

Hypothetical example: a depeg and currency effect on a dollar stablecoin.

Assumptions: you hold 5,000 units of a dollar stablecoin bought at $1.00. Fees and taxes excluded.

1. Value at peg: 5,000 × $1.00 = $5,000.
2. The stablecoin depegs to $0.90. Value: 5,000 × $0.90 = $4,500. Loss: $500 (10%).
3. Currency effect: you bought when €1 = $1.10, so you paid $5,000 ÷ 1.10 ≈ €4,545.45. Later €1 = $1.20 while the coin is back at $1.00: $5,000 ÷ 1.20 ≈ €4,166.67.
4. Euro loss from the exchange rate alone: €4,545.45 − €4,166.67 = €378.78, even though the peg held.

Common mistake

Practice activity

Hypothetical: you hold 2,000 units of a euro stablecoin and 1 coin of a small altcoin bought for €1,000. In a market crash, the stablecoin falls to €0.95 and the altcoin falls 85%. (a) What is each position worth? (b) What is your total loss?

Limitations: real crashes can go further, including total loss of a token or a stablecoin issuer failing.

Key takeaways

• Altcoins and tokens vary widely; many have lost nearly all their value.
• Stablecoins aim for a fixed value but can depeg and are not bank deposits.
• Dollar stablecoins carry exchange-rate risk for euro investors.
• Many crypto-assets fall together, so owning many coins is still concentrated.

Next step

In the next lesson, you will learn how to recognise scams and protect yourself.