Why does a $1 token sometimes trade at $0.97?
A stablecoin is a token designed to track the value of a currency such as the dollar, or another reference asset. Most of the time it sits near $1.00 on exchange screens, but in stressed markets some have fallen to $0.97, $0.90, or much lower. The word "stable" describes a goal, not a guarantee.
This guide explains the mechanisms stablecoins use to hold their value, how risks differ by type, and what happens when the price breaks away, using hypothetical numbers. It ends with a list of documents to check before relying on any particular stablecoin.
Three mechanisms behind the peg
The first is reserves: cash, bank deposits, short-term government securities, or other assets held to back the tokens in circulation. The second is issuance and redemption. Eligible participants must be able to give the issuer $1 for a new token, or return a token for $1, for the market price to stay anchored.
The third is arbitrage. If the market price falls to $0.98, a participant with redemption rights can buy tokens on the market and redeem them with the issuer for $1, and that buying pushes the price back up. At $1.02, the same participant can mint new tokens and sell them. If any of the three mechanisms is doubted, the price can wobble.
Types and their risks
Ethereum.org and the Bank for International Settlements both group stablecoins by what backs them. Each type draws its stability from a different source and fails in a different way.
| Type | What backs it | How the peg is held | Main risks |
|---|---|---|---|
| Fiat-reserve | Cash, deposits, short-term T-bills | Issuer redeems 1:1 | Reserve quality, custodians, issuer credit |
| Crypto-collateralized | Over-collateralized crypto such as ETH | Liquidations and rate adjustments | Collateral crashes, smart-contract bugs |
| Algorithmic | Supply rules and a linked token | Minting and burning algorithm | Death spiral if confidence breaks |
Even within one type, reserve composition, disclosure, and redemption terms vary widely by issuer.
Reading a "100% backed" claim
"Fully backed" tells you little about asset quality. Reserves held as on-demand deposits behave very differently from longer-dated bonds when redemptions surge, and it matters which banks and custodians hold them.
The type of report matters as well. An attestation confirms balances at a point in time; an audit has a different scope. A monthly or quarterly report leaves the period in between unseen. The Financial Stability Board has issued recommendations for global stablecoin arrangements covering reserve management, redemption rights, and disclosure.
When the price breaks away
Doubts about reserves, trouble at an issuer's bank, or heavy selling concentrated on one exchange can push the price off its peg. If redemptions are delayed or open only to a few participants, arbitrage may not work fast enough and the gap can persist.
Most individual users cannot redeem directly; they can only trade on exchanges. As a hypothetical example, an issuer may promise $1 redemption but require a $100,000 minimum and charge 0.1%. For a small holder, the price they can actually get may be the exchange quote of $0.97. The price on screen and the amount you can realize are not always the same.
Operational and regulatory risk
A stablecoin depends on an issuer, banks, custodians, a blockchain, and smart contracts, each with its own operational risk. Many fiat-reserve stablecoins let the issuer freeze tokens at specific addresses, so holdings can be locked for sanctions compliance or under court orders.
Regulation is changing quickly. The EU's Markets in Crypto-Assets regulation (MiCA), for example, places reserve and redemption obligations on issuers, and rules differ from country to country. The same token can offer different access and legal protection depending on where you use it.
What to check before relying on a stablecoin
Use the issuer's official materials to work through the steps below before holding or using a specific stablecoin.
- Identify the issuer, which jurisdiction regulates it, and who has redemption rights on what terms.
- In the latest reserve report, check the asset mix (cash, deposits, T-bills), maturities, and custodians.
- Note whether the report is an attestation or an audit, how often it is published, and its reference date.
- Read the terms on minimum redemption size, fees, processing times, and freezing powers.
- Compare trading volume and the price gap from $1 across the exchanges and networks you actually use.
The limits of "stable"
A stablecoin's stability depends on reserves, redemption, and market confidence holding together. A token that has traded at $1.00 for years can move sharply within hours if one of them fails.
The redemption terms and prices above are hypothetical. Real stablecoins' reserves and regulatory status change over time, so rely on the issuer's latest disclosures and regulators' publications, noting their dates.