By Alun John, Elizabeth Howcroft, and Samuel Indyk
HONGKONG/LONDON – The collapse of TerraUSD, one of the world’s largest stablecoins, rocked cryptocurrency markets on Thursday, pushing its peer Tether below its dollar peg and pushing Bitcoin to 16-month lows.
Cryptocurrencies have been dragged down by a sell-off in riskier assets, which has gathered steam this week after data showed US inflation remains high, raising investor fears about the economic impact of an aggressive tightening of the monetary policy of central banks.
The sale has brought the combined market value of all cryptocurrencies to $1.12 trillion, about a third of what it was last November, according to data from CoinMarketCap, and more than 35% of that loss has come this year. week.
Bitcoin, the largest cryptocurrency by market cap, hit a low of $25,401.05 on Thursday, its lowest level since Dec. 28, 2020.
In the past eight sessions, it has lost nearly a third of its value, or about $13,000, and is down more than 45% year-to-date. Bitcoin is also down nearly two-thirds from its high of $69,000 in November 2021.
Bitcoin’s correlation with the Nasdaq Composite has risen recently and is now near its all-time high, according to Refinitiv data. The Nasdaq has plunged about 8% so far this month.
Ether, the world’s second-largest cryptocurrency, fell as much as 15% on Thursday to $1,700, its lowest level since June 2021.
Unlike previous financial market sell-offs, in which cryptocurrencies remained largely untouched, the selling pressure on these assets this time around has undermined the argument that they are reliable stores of value amid market volatility.
CRYPTOCURRENCIES NOT SOSTABLE
The stablecoin TerraUSD was hit by the turbulence and broke its parity with the dollar, falling as low as 31 cents on Wednesday. On Thursday it was trading around 47 cents.
Stablecoins are digital ‘tokens’ pegged to the value of traditional assets, such as the dollar. However, TerraUSD is an algorithmic, or “decentralized” stablecoin, and was supposed to maintain its peg to the dollar through a complex mechanism that involved exchanging it with another free-floating token.
“The collapse of the TerraUSD parity has had some unpleasant and predictable effects. We have seen extensive liquidation in BTC, ETH and most currencies ALTsaid Richard Usher, of BCB Group, referring to other cryptocurrencies.
Even stablecoins backed by traditional assets were showing signs of strain on Thursday.
Tether fell below its 1:1 parity with the dollar, reaching a low of 95 cents around 0724 GMT Thursday, according to data from CoinMarketCap.
“The lack of transparency provided by Tether about the quality of commercial paper they hold to support peg made it the obvious next target,” Usher said.
“However, Tether is a very different animal than Terra, with a more proven ecosystem and I am much more confident that when the volatility subsides it will be able to regain its parity and stability,” he added.
Paolo Ardoino, Tether’s chief technology officer, said in a Twitter Spaces chat that the stablecoin has reduced its exposure to commercial paper over the past six months and now holds the majority of its reserves in US Treasuries.
Ardoino said that a quarterly update on Tether reserves would be available by the end of the month.
Tether is the largest stable cryptocurrency by market capitalization and along with USD Coin and Binance USD they account for nearly 87% of the total $169.5 billion stablecoin market, according to CoinMarketCap.
The large number of centralized cryptocurrency exchanges and decentralized hubs, each with its own liquidity and credit risk profile, is contributing to price distortions across the market, said Denis Vinokourov, director of research at Corinthian Digital Asset Management.
“Spillover effects to other stablecoins are partly due to the fragmented nature of the market,” Vinokourov said. “This credit risk, especially in times of tight liquidity conditions and massive deleveraging, leads to further price distortions.”
Market players continue to assess the impact of TerraUSD’s troubles on investors.
In its bi-annual Financial Stability Report on Tuesday, the Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that may lose value or become illiquid during times of market stress.
GRAPHIC (in English): Bitcoin https://tmsnrt.rs/3w8oGNi
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