Stablecoins vs bitcoin: The 3 major differences explained | BVNK Blog (2024)

In this guide

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Introduction

Cryptocurrencies can help businesses overcome significant pain points of making and receiving payments, and are fast becoming an essential part of the global payments ecosystem. In this article, we will look at two major cryptocurrencies: bitcoin and stablecoins. We will explore the major differences between them, and how a business can decide if and how to adopt them.

Stablecoins vs bitcoin – quick summary

The global cryptocurrency market cap is $1.23 trillion. That would put it comfortably in the top 20 economies in the world. Of that market, bitcoin is by far the largest cryptocurrency, with a market cap of almost $600bn, accounting for 48% of the entire market. Stablecoins, which are a category of cryptocurrencies (of which there are almost 100 varieties in circulation) is collectively worth almost $128bn, about 10% of the market.

Both stablecoins and bitcoin operate outside traditional finance infrastructure. As such, they are unencumbered by some of the frustrations that businesses face when using banking and card networks to make payments and settlements. These include slow processing times, opaque costs, and access to markets with high rates of financial exclusion.

Users of bitcoin and stablecoins use blockchains to exchange their currencies. This can benefit businesses in a number of ways, including faster settlement times, lower costs, reduced operational complexity, and access to markets where cryptocurrencies are becoming popular payment methods.

Though bitcoin and stablecoins operate on blockchains, there are significant differences between them. Later in this article we will explore the three main differences: purpose, management, and interoperability. But first, let’s recap what we know about bitcoin and stablecoins.

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Stablecoins in brief

A stablecoin is a cryptocurrency that is designed to minimise price volatility. It does this by pegging its price to a more stable asset, typically a fiat currency or a ‘hard’ commodity such as gold. To keep the price of their coins stable, operators will maintain physical stocks of the underlying asset, or employ algorithms that adjust to fluctuations in demand and supply. There are four different types of stablecoin.

Fiat-collateralised stablecoins

Fiat-collateralised stablecoins (also known as off-chain stablecoins) are backed by reserves of traditional fiat currencies, such as the US dollar, held in a bank account or custody service. The issuer matches the stablecoin supply with an equivalent amount of fiat currency. Examples of fiat-collateralised stablecoins include Tether (USDT) and USD Coin (USDC).

Commodity-collateralised stablecoins

Commodity-collateralised stablecoins are backed by reserves of tangible assets, such as gold, silver, or other commodities. The issuer holds a certain quantity of the commodity in reserve for each stablecoin in circulation, in order to tie the value of the stablecoin to that of the underlying commodity. Examples of commodity-collateralised stablecoins include PAX Gold (PAXG) and Tether Gold (xAUT).

Cryptocurrency-collateralised stablecoins

Cryptocurrency-collateralised stablecoins (also known as on-chain stablecoins) are backed by a reserve of other cryptocurrencies, such as Ether (ETH) or bitcoin (BTC). These stablecoins use smart contracts to lock in cryptocurrency stock. Examples of cryptocurrency-collateralised stablecoins include Dai (DAI) and Wrapped Bitcoin (WBTC).

Algorithmic stablecoins

Algorithmic stablecoins (also known as non-collateralised or seigniorage-style stablecoins), use algorithms and smart contracts to control the supply and value of the stablecoin. When the price of the stablecoin is above its peg, the algorithm increases the supply to bring it down, and vice versa. USDD is an example of an algorithmic stablecoin.

Bitcoin in brief

Unlike stablecoins, bitcoin is a single cryptocurrency. It is the oldest operational cryptocurrency (launched in January 2009), and by far the largest. As the bitcoin network uses cryptographic ‘keys’ to send and receive its tokens, it is impossible to know exactly how many users there are today; but we do know that around $13.4 trillion bitcoins are exchanged daily.

The mechanics of bitcoin can be difficult to understand, as they are so far removed from traditional finance. The key concept of bitcoin is its decentralisation; no one organisation or person ‘owns’ the bitcoin network, but instead its operation and oversight is shared by computers (known as ‘nodes’) that are distributed around the world. Bitcoin transactions take place directly between users, and are recorded on an immutable public ledger.

Though bitcoin has been predominantly used as an investment asset, it is becoming increasingly adopted as a medium of exchange too. Companies that accept bitcoin payments include Starbucks, Microsoft and AT&T.

A major criticism of bitcoin is its price volatility. In the last 12 months alone, bitcoin’s price has been as high as $31,134, and as low as $15,742. For businesses, this unpredictability makes it difficult to price products and services accurately, or determine the optimum time to convert bitcoin into fiat or another cryptocurrency.

Bitcoin is largely unregulated around the world, but many countries and jurisdictions do recognise it as a payment method, including the US, Canada, EU, UK, Australia and Japan.

Is bitcoin a stablecoin?

No, bitcoin is not considered a stablecoin. A stablecoin is a type of cryptocurrency that is designed to maintain its value by pegging its price to a stable asset like a fiat currency (eg US dollar) or a commodity (eg gold). The purpose of stablecoins is to minimise price volatility, making them more suitable for transactions and as a store of value.

Bitcoin is known for its price volatility. Bitcoin's price is determined by supply and demand dynamics in the open market, and it is not pegged to any external asset or currency. Its value can fluctuate significantly within short periods of time due to various factors such as market demand, investor sentiment and regulatory developments.

Stablecoin vs bitcoin: 3 major differences

Bitcoin and stablecoins are both types of cryptocurrencies, but they have several key differences. Here are three main distinctions between bitcoin and stablecoins.

Purpose

Bitcoin and stablecoins differ in their intended purposes. Bitcoin was created as a decentralised digital currency, aiming to provide an alternative to traditional fiat currencies. Bitcoin's price is primarily driven by market demand and speculation, which can result in rapid price swings. Though bitcoins are used for payments, their primary use is as a long-term store of value and hedge against fiat inflation and currency devaluations. In contrast, stablecoins were primarily developed to address the price volatility of cryptocurrencies like bitcoin. The leading stablecoins achieve price stability by holding 1:1 reserves of a specific asset or currency (typically the US dollar), allowing them to mirror their price. With more stable prices, stablecoins are more suitable for payments and business settlements.

Management

The leading stablecoins are ‘centralised’ cryptocurrencies. This means that coins are issued and managed by a single entity or organisation. For example, Tether is issued by Tether Limited; USD Coin is issued by Centre, a consortium founded by Circle. Users of these stablecoins must trust the issuer to properly manage the underlying reserves. Many stablecoin issuers publish independent audits or attestations of their reserves. For example, here is the transparency page for Tether, and this is the one for USD Coin. Centralised cryptocurrencies carry counterparty risk (as do relationships with any traditional financial institution), but benefit from having a point of accountability, which makes them easier to regulate.

Bitcoin is a decentralised cryptocurrency, which means it operates without a single controlling entity. (Note that: Stablecoins that use algorithmic mechanisms, such as Dao, are also classed as decentralised.) Bitcoin is managed by a protocol that was embedded into its network from the start and is maintained through a consensus mechanism. This determines when new bitcoins are issued, who to, and how transactions are verified. It also prioritises user privacy by employing cryptographic techniques that protect their identity

Interoperability

Stablecoins are able to operate across multiple blockchains, unlike bitcoin which exists solely on its own network. By operating across multiple blockchains, stablecoins can achieve interoperability, enabling them to be seamlessly transferred and used across different blockchain networks. This interoperability promotes liquidity and use across decentralised finance (DeFi) platforms and ecosystems.

It also means stablecoins can be processed more efficiently, especially during times of high network congestion, by utilising blockchain networks with faster transaction confirmation times and higher throughput. It also improves the resilience of the stablecoin by eradicating the single point of failure, reducing the risk of downtime, and mitigating regulatory uncertainty in a single jurisdiction. This all ensures that the stablecoin remains accessible and functional at all times.

Finally, developers and entrepreneurs can explore different blockchain networks, test new features, and experiment with unique functionalities specific to each blockchain. This creates competition and innovation within the stablecoin market. For example, a variety of new stablecoins have been launched recently that are designed to break the dominance of the US dollar peg: Circle launched Euro Coin (issued by Circle); TrueEuro (issued by Archblock); AUDT (issued by the National Australia Bank); and poundtoken (issued by Blackfridge).

We have also seen new stablecoins experiment with unique pegging mechanisms; for example, Frax, which is now the sixth largest stablecoin by market cap, has parts of its supply backed by collateral and parts of the supply controlled algorithmically. (It refers to this as a “fractional-algorithmic” stablecoin.)

It's worth noting that implementing and maintaining stablecoin interoperability across multiple blockchains can be technically complex and requires coordination between different blockchain communities and stakeholders.

Though bitcoin only operates on its own blockchain, it is an open-source and decentralised technology, which enables continuous innovation and development by anyone. There are plenty of examples of this. The Lightning Network is a layer-two scaling solution built on top of the bitcoin blockchain that enables faster and cheaper ‘off-chain’ transactions. This makes bitcoin more suitable as a payment method, especially for small value transactions.

Taproot is a proposed upgrade to the bitcoin protocol that aims to enhance privacy, scalability, and smart contract flexibility. It introduces a new signature scheme called Schnorr signatures, which allows multiple participants to collaborate on a single signature. CoinJoin, Wasabi Wallet, and Samourai Wallet are projects that have introduced techniques to obfuscate transactions, enhancing privacy and confidentiality. RSK, Sovryn, and Stacks (formerly Blockstack) are developing lending, borrowing and other DeFi services that leverage smart contracts on the bitcoin blockchain.

Stablecoins vs bitcoin: Which is safer?

Bitcoin and the leading stablecoins have strong track records and should be considered safe. Deciding which is safer is really a judgement about the merits of centralised versus decentralised cryptocurrencies, and what you intend to use the currency for.

Counterparty risk

As we have just read, centralised stablecoins come with counterparty risk; but also counterparty and regulatory oversight. Bitcoin’s blockchain has proven to be safe from cyber attacks, while its consensus protocol, incentive structures and scale make it virtually impossible to subvert for individual gain.

Price volatility

We have also read how bitcoin’s price can be volatile. This is only an issue if you are using bitcoin as a payment method, or for short-term speculation. Price instability is less of a problem if you are using bitcoin as a long-term balance sheet asset. Conversely, stablecoins can be considered safer from a price perspective, though they are not without risk. Algorithmic stablecoins have proved to be less reliable, and are more prone to sell-offs when the market loses confidence. The TerraUSD stablecoin is a high profile example. For example, in May 2022, it became depegged from the dollar and lost almost all of its value. Some leading fiat-collateralised stablecoins have broken their peg. In March 2023, USD Coin (USDC) lost its dollar peg, dropping to as low as 87 cents, as a result of $3.3 billion of reserves held at the failed Silicon Valley Bank (SVB). When the bank collapsed, USDC holders quickly redeemed over $1 billion of USDC for dollars, causing the dramatic price slippage. While these drops don’t seem large, they can have profound impacts for businesses that are using them to settle payments or that hold a large volume of them on their balance sheet. But stablecoins have regularly demonstrated their resilience. In all three examples, the peg was restored within a few days.

Regulation

Regulation is another factor to consider when analysing if stablecoins or bitcoin is safer. Though bitcoin is legal in most countries (Qatar, Saudi Arabia, China are notable exceptions where all cryptocurrencies are banned), it is unregulated. Some stablecoins offer an element of regulatory protection. For example, Gemini Dollar (GUSD), Binance USD (BUSD) and Pax Dollar (USDP) are already regulated by the New York State Department of Financial Services, though its jurisdiction primarily covers financial institutions operating within the state of New York. The administrator of USD Coin (USDC), Circle, is regulated by the FCA in the UK, and by the Financial Crimes Enforcement Network (FinCEN) in the US.

Advocates of stablecoins should be encouraged by this. More regulation will ultimately protect merchants and their customers. A new draft bill in the United States proposes that the Federal Reserve approves any non-bank stablecoin issuers, including those located abroad but offering their stablecoins on US exchanges. Among the factors for approval are the ability to maintain and prove reserves backing stablecoins; demonstrable technical expertise and established governance; and initiatives that promote financial inclusion and innovation.

In the EU, the new MiCA framework (Markets in Crypto-Assets) is now in force, which subjects stablecoins to new obligations around transparency and consumer protection. In the UK, the new Financial Services and Markets Bill (FSMB) places similar regulatory oversight on stablecoins.

This is not a zero-sum game. Regulators supportive approach towards stablecoins does not mean that bitcoin is about to face a challenging regulatory climate. For one thing, many regulatory measures cover all cryptocurrencies, including bitcoin. More fundamentally, bitcoin has become so established that regulators who looked to stem its growth would likely face a backlash from businesses.

Stablecoins vs bitcoin: Which one is best for B2B payments and settlements in 2023?

Ultimately, the choice between stablecoins and bitcoin for B2B payments in 2023 depends on factors such as the specific needs of the businesses, the desired level of stability, regulatory considerations, transaction volume and size, geographical scope, and the willingness to adopt and navigate the cryptocurrency ecosystem.

In general, stablecoins have features that make them better for B2B payments and settlements. Our own data shows this:of the total payments collected by BVNK through our Global Settlement Network in the last 12 months, almost 60% were stablecoins. Around 15% of payments were also settled in stablecoins. For the remainder, stablecoins were used as an intermediary to move fiat funds, mainly euros, pounds and dollars.

The most important reason for this adoption of stablecoins for B2B payments and settlements is their price stability, which can provide businesses with predictable pricing and mitigates currency slippage during settlement. Also, stablecoins often mimic the functionality of traditional fiat currencies, making them more familiar to businesses accustomed to traditional payment systems, and making them easier to integrate into existing payment systems. We have also read how stablecoins are at the forefront of cryptocurrency regulations.

But businesses should be aware not to treat all stablecoins the same. There are around 100 stablecoins in circulation, with different governance models, operating mechanisms, and existing regulatory oversight. It is important to evaluate each stablecoin on its own merits. Scale should be an important consideration.

Stablecoins with tried and tested technology, deep liquidity and an experienced management team are more likely to withstand market shocks and navigate evolving regulations. Fiat-collateralised stablecoins present businesses with the easiest way to bridge traditional and cryptocurrency payment and settlement rails, and so support a flexible approach to stablecoin adoption. Using this criteria, businesses should first consider Tether, USD Coin, Binance USD, True, Pax Dollar and Gemini Dollar.

FAQs: stablecoin vs bitcoin

Are stablecoins better than Bitcoin?

Ultimately, the choice between stablecoins and bitcoin for B2B payments depends on factors such as the specific needs of the businesses, the desired level of stability, regulatory considerations, transaction volume and size, geographical scope, and the willingness to adopt and navigate the cryptocurrency ecosystem.

In general, stablecoins have features that make them better for B2B payments and settlements.

Is Bitcoin a stablecoin?

No, bitcoin is not considered a stablecoin. A stablecoin is a type of cryptocurrency that is designed to maintain its value by pegging its price to a stable asset like a fiat currency (eg US dollar) or a commodity (eg gold). The purpose of stablecoins is to minimise price volatility, making them more suitable for transactions and as a store of value. Bitcoin is known for its price volatility. Bitcoin's price is determined by supply and demand dynamics in the open market, and it is not pegged to any external asset or currency. Its value can fluctuate significantly within short periods of time due to various factors such as market demand, investor sentiment and regulatory developments.

What's the difference between stablecoin and cryptocurrency?

Stablecoins are a type of cryptocurrency. Unlike other cryptocurrencies like bitcoin, stablecoins are designed to maintain their value by pegging their price to a stable asset like a fiat currency (eg US dollar) or a commodity (eg gold). The purpose of stablecoins is to minimise price volatility, making them more suitable for payments.

Why is Bitcoin better than stablecoin?

The choice between stablecoins and bitcoin for B2B payments depends on factors such as the specific needs of the businesses, the desired level of stability, regulatory considerations, transaction volume and size, geographical scope, and the willingness to adopt and navigate the cryptocurrency ecosystem. In general, stablecoins have features that make them better for B2B payments and settlements.

Conclusion

In this article we have looked at the main differences and use-cases between bitcoin and stablecoins, including the key benefits and risks of each.

One of the big questions for businesses is how to adopt either bitcoin or stablecoins as a payment and settlement method. For many businesses, cryptocurrencies are unfamiliar territory. As well as being perceived as complex, they may be seen as risky too.

Businesses can offload these challenges to a third party. The third party, often a fintech, can take on the full exposure to the cryptocurrency when converting it between fiat currencies; embed regulatory compliance into their solutions; and provide businesses with easy ‘on’ and ‘off’ ramps that bridge the worlds of traditional and cryptocurrency finance. BVNK is one such fintech. Using the BVNK platform, businesses can incorporate stablecoins into their fiat payment and settlement flows.