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Crypto Crisis Worsens As Tether, A Stablecoin, Falls Below The Dollar's Peg


Crypto Crisis Worsens As Tether, A Stablecoin, Falls Below The Dollar's Peg
On Thursday, the collapse of TerraUSD, one of the world's largest stablecoins, sent shockwaves across cryptocurrency markets, plunging Tether below its dollar peg and driving bitcoin to 16-month lows.
Cryptocurrencies have been swept up in a sell-off in higher-risk assets that has gained traction this week as data revealed rising U.S. inflation, escalating investor concerns about the economic implications of aggressive central bank tightening.
According to CoinMarketCap data, the overall market value of all cryptocurrencies has dropped to $1.12 trillion, roughly a third of what it was in November, with more than a third of the loss occurring this week.
Bitcoin, the most valuable cryptocurrency, fell to $25,401.05 on Thursday, its lowest level since December 28, 2020. It has lost about a third of its value in the last eight sessions, or around $13,000, and is down more than 45 percent this year.
Bitcoin is also down roughly two-thirds from its November 2021 high of $69,000.
According to Refinitiv statistics, Bitcoin's correlation with the Nasdaq composite has lately increased and is now around its all-time high. So far this month, the Nasdaq composite has down approximately 8%.
On Thursday, Ether, the world's second-largest cryptocurrency, plummeted about 15 per cent to $1,700, its lowest level since June 2021.
Unlike earlier financial market sell-offs, when cryptocurrencies were mostly unaffected, this time around, the selling pressure in these assets has weakened the broader argument that they are reliable stores of value in the face of market turbulence.
TerraUSD, a stablecoin, has been impacted by the instability and has broken its peg to the US dollar, plummeting as low as 31 cents on Wednesday. It was trading at roughly 47 cents on Thursday. continue reading
Stablecoins are digital tokens that are linked to traditional assets like the US dollar. TerraUSD, on the other hand, is an algorithmic (or "decentralised") stablecoin that was supposed to keep its dollar peg by a complicated system that entailed swapping it with another free-floating currency.
"The collapse of the peg in TerraUSD has had some nasty and predictable spillovers. We have seen broad liquidation in BTC, ETH and most ALT coins," said Richard Usher, head of OTC trading at BCB Group, referring to other cryptocurrencies.
On Thursday, even stablecoins backed by traditional assets showed symptoms of stress.
Tether fell below its 1:1 dollar peg on Thursday, hitting a low of 95 cents around 0724 GMT, according to CoinMarketCap data.
"The lack of transparency provided by Tether on the quality of commercial paper they hold to back the peg made it the obvious next target," said BCB Group's Usher.
"However, Tether is a very different animal to Terra, with a more proven ecosystem and I have far more confidence that when volatility subsides it can regain its peg and stability," he said.
Tether's chief technology officer, Paolo Ardoino, claimed in a Twitter Spaces chat that the stablecoin has reduced its exposure to commercial paper in the last six months and currently has the majority of its reserves in US Treasury bonds.
Tether reserves will be updated quarterly, according to Ardoino, later this month. Tether is the most valuable stablecoin by market capitalization, accounting for about 87 per cent of the whole $169.5 billion stablecoin market, according to CoinMarketCap.
According to Denis Vinokourov, head of research at Corinthian Digital Asset Management, the enormous number of centralised cryptocurrency exchanges and decentralised venues, each with their own liquidity profile and credit risk, was contributing to price distortions across the market.
"The spillover effects into other stablecoins is in part driven by the fragmented nature of the market," Vinokourov said.
"This credit risk, especially during the times of tight liquidity conditions and mass deleveraging leads to further price distortions."
The impact of TerraUSD's problems on investors is still being assessed by market participants.
The United States released its biannual Financial Stability Report on Tuesday. Because stablecoins are backed by assets that can lose value or become illiquid in times of market stress, the Federal Reserve has warned that they are vulnerable to investor runs.