Cryptocurrency Slump Deepens As Tether Stablecoin Sags Below Dollar Peg

Hong Kong / London: The collapse TerraUSDone of the largest in the world stable coinssent shockwaves cryptocurrency markets Thursday, by pushing another Tether stablecoin below its dollar peg and sending it bitcoin at 16-month lows.

Cryptocurrencies were wiped out by a sell off in higher-risk assets, which took off this week as data showed inflation in the US is racing, increasing investor fears about the economic impact of the aggressive tightening. of the central bank.

The sell-off brought the combined market value of all cryptocurrencies to $ 1.12 trillion, about a third of where it was last November, based on data from CoinMarketCapwith over 35% of that loss coming this week.

Bitcoin, the largest cryptocurrency by market cap, hit a low of $ 25,401.05 on Thursday, its lowest level since December. 28, 2020. Over the past eight sessions, it has lost nearly a third of its value, or around $ 13,000, and has dropped more than 45% so far this year.

Bitcoin is also down nearly two-thirds from its peak of $ 69,000 in November 2021.

Bitcoin’s correlation with the Nasdaq composite has been on the rise recently and is now close to its all-time high, based on Refinitiv data. The Nasdaq composite has plummeted about 8% so far this month.

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Ether, the second largest cryptocurrency in the world, fell nearly 15% on Thursday to $ 1,700, its lowest since June 2021.

Unlike previous sales on the financial markets, when cryptocurrencies remained largely intact, the selling pressure in these assets this time undermined the broader argument that they are reliable stores of value amid market volatility.

Coins not so stable

Stablecoin TerraUSD was hit by the turmoil and broke its peg to the US dollar, which led it to drop as low as 31 cents on Wednesday. On Thursday it was trading at around 47 cents.

Stablecoins are digital tokens anchored to the value of traditional assets, such as the US dollar. But TerraUSD is an algorithmic, or “decentralized” stablecoin, and was supposed to hold its dollar peg through a complex mechanism that involved trading with another floating token.

“The collapse of the peg in TerraUSD has had some unfortunate and predictable fallout. We have seen a large liquidation of BTC, ETH and most ALT currencies,” said Richard Usher, head of OTC trading at BCB Group, referring to other cryptocurrencies.

Traditional asset-backed stablecoins also showed signs of stress on Thursday.

Tether slipped below its 1: 1 dollar peg, hitting a low of 95 cents around 0724 GMT on Thursday, based on data from CoinMarketCap.

“The lack of transparency provided by Tether about the quality of the commercial paper they hold to back the peg has made it the obvious next target,” said Usher of the BCB Group.

“However, Tether is a very different animal to Earth, with a more proven ecosystem and I have much more confidence that when volatility subsides it can regain its stability and stability,” he said.

Paolo Ardoino, Tether’s chief technology officer, said in a Twitter Spaces chat that the stablecoin has reduced its exposure to commercial papers in the past six months and now holds the majority of its reserves in U.S. Treasuries.

Ardoino said a quarterly update on Tether’s reserves will be available later this month.

Tether, is the largest stablecoin by market cap and, along with USD Coin and Binance USD, account for nearly 87% of the total $ 169.5 billion stablecoin market, according to CoinMarketCap.

The large number of centralized cryptocurrency exchanges and decentralized locations, each with their own liquidity and credit risk profile, were adding to price distortions across the market, said Denis Vinokourov, head of research at Corinthian Digital Asset Management.

“The spillover effects on other stablecoins are driven in part by the fragmented nature of the market,” Vinokourov said.

“This credit risk, especially during times of tight liquidity conditions and mass deleveraging, leads to further price distortions.”

Market players are still evaluating the impact of TerraUSD woes on investors.

In its two-year financial stability report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become illiquid in times of market stress.