Stablecoins – effective bridge between fiat and crypto, or a bridge too far?

This paper assesses Stablecoins’ rapid growth, their stability, and correlation with other assets, and risks to financial stability.

Key takeaways:

• Stablecoins have grown rapidly since Covid, as a blockchain-based money, with liquidity and cross-border transferability, and as a stable store of value
• Unlike other crypto currencies, like Bitcoin, they are backed by reserve assets, though the 1:1 peg to underlying reserve assets has some flexibility, like a currency board
• Using FTSE Russell data, we find Stablecoins show a very stable return profile and low volatility versus other cryptocurrencies and financial assets, since 2020
• Stablecoins backed by fiat currency cash and near-cash display lower volatility than those collateralised by crypto currencies, and low correlation to Bitcoin and Ethereum

Points of differentiation:

• We embed the analysis of Stablecoins in the context of broader correlations of returns across multi-asset classes
• Our empirical research also finds that Stablecoin growth is correlated with US M2 growth and broader monetary conditions
• The paper also assesses the difference in approach to Stablecoins in Europe and the US, and how Stablecoins may affect financial stability and the dollar’s role as the primary reserve currency

What does our research mean for investors?

For investors, our empirical work confirms the stability of Stablecoins, with the exception of Terra’s collapse in 2022. The paper is a sequel to the February 2025 FTSE Russell paper, Digital assets – evolution and correlations with other asset classes, and helps inform investor decisions by explaining Stablecoin risks and opportunities, and their differences with other cryptocurrencies.