Cryptocurrencies: what is a stablecoin and why Tether is key to the digital asset market

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Cryptocurrencies: what is a stablecoin and why Tether is key to the digital asset market

Tether price drop has increased tensions in the cryptocurrency marketsunderlining the central role of the stablecoin in the daily trading of digital assets What bitcoin.

Although it is supposed to have parity with the US dollar, Tether came to trade at $95.11 yesterday, before recovering some of the ground lost to the turning to social media to reassure markets.

Tether crash increased the pressure on a cryptocurrency market that has faltered following the collapse in value of TerraUSDa stablecoin much smaller.

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Here is a guide to understand why Tether plays such an important role in the cryptocurrency market and what might happen if problems are detected.

What is a stablecoin and why is Tether important?

The stablecoins are a type of cryptocurrency linked to other assets to reduce their volatility Y play an intermediary role between traditional currenciesAs the US dollar and euroand the digital tokens, such as bitcoin and ether. Use dollars normal to buy cryptocurrencies can be difficult for operators, since settlement is slow and the cryptocurrency price What bitcoin may undergo strong fluctuations.

Instead, traders often use traditional currencies to buy stablecoinswhich are accepted in various cryptocurrency exchanges. This allows operators buy and sell volatile digital assets faster.

Tether has issued more than $80 billion in cryptocurrencies for its circulation, which makes it the largest stablecoin on the market and in one fundamental source of liquidity for the crypto economy.

A fundamental aspect of its operation is the company’s commitment that Tether will maintain parity with the US dollar and from what has the backed by its asset reserves, such as the public debt of the United States, the short-term corporate debt and one relatively small amount of cash.

Why is it so popular?

The position of Tether in the market, with 50% of the feeis still much higher than that of USD Coinwhich ranks second at 30%, according to the data site cryptocurrencies CoinGecko.

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It is the oldest stablecoin on the market and continues to dominate the use of stablecoinespecially in the markets outside the United States. USD Coin, which was launched in 2018, has positioned itself as a more favorable option for USA.

Like other stablecoins, Tether also used in “yield platforms” that lend cryptocurrencies at a higher rate than what they offer to customers.

Tether has also been used outside USA What alternative to the dollar, where access to traditional currency is more limited. In December, Myanmar National Unity Government (in opposition, after the coup) announced that he had recognized Tether as official currency.

Why Tether arouses controversy?

His detractors have frequently questioned the statements of Tether that their tokens are fully asset-backed.

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The Attorney General’s Office New York and the Commodity Futures Trading Commission (CFTCfor its acronym in English) of USAwhich regulates derivatives, have collectively fined the company nearly $60 million for claiming that their tokens were fully backed by dollars until 2019. Tether he settled on both counts without admitting or denying responsibility.

Behind the agreement with the New York authorities, Tether began publishing financial data that showed a breakdown of its Bookings. In December, almost a 25% was still in commercial papera short-term financing instrument. Tether has not revealed the identity or origin of the issuers of this debtbeyond affirming that some of its participations are international.

What happens if Tether loses parity with the dollar for a long time?

Although the stablecoins marketed as stable, in practice they fluctuate constantly. According to a report from JPMorgan July of last year, the four largest stablecoins had spent between 30 and 40% of the previous three months trading below par.

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However, these fluctuations are usually relatively low. Yes Tether lost its peg to the US dollar for a long timecould have a destabilizing impact on the cryptocurrency market.

The crypto traders that have large reserves in Tether they will realize that their shares are worth less, which could force them to sell other tokens, and cause a run to claim the dollars in exchange of their devalued Tether coins.

If users were to rush to exchange your Tether for dollarsthe sponsors of the stablecoin they will have to sell traditional assets they say they have in order to pay. The avalanche of sales could affect the main traditional markets, like those of the short-term corporate debt either government bonds.

Central banks around the world They fear that the impact of stablecoin collapse can expand into traditional financial markets. Earlier this week, the US Treasury Secretary Janet Yellenwarned that the terra value collapse illustrated that the stablecoins they were “a rapidly growing product and there are increasing risks.”

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