Cryptocurrency crash deepens as stablecoin Tether drops below dollar peg

HONG KONG/LONDON, May 12 (Reuters) – The collapse in TerraUSD, one of the world’s largest stablecoins, sent shockwaves through crypto markets on Thursday, sending another stablecoin Tether below its dollar peg and sending Bitcoin to its lowest level in 16 months.

Cryptocurrencies were hit by a massive sell-off across riskier assets, which gained ground this week as data showed inflation soaring in the US, deepening investor concerns about the economic impact of a violent central bank tightening.

The sale brought the combined market capitalization of all cryptocurrencies to $1.12 trillion, about a third of what it was last November, based on data from CoinMarketCap, with more than 35% of that loss coming this week.

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Bitcoin, the largest cryptocurrency by market capitalization, hit a low of $2,5401.05 on Thursday, the lowest since December 28, 2020. In the past eight sessions, it has lost nearly a third of its value, or about $13,000, and plunged further From 45% so far this year.

Bitcoin has also fallen by nearly two-thirds from its peak of $69,000 in November 2021.

Bitcoin’s correlation with the Nasdaq Composite (.IXIC) has been on the rise lately and is now near an all-time high, based on Refinitiv data. The Nasdaq Composite is down about 8% so far this month.

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

Unlike previous sell-offs in financial markets, when cryptocurrencies were largely untouched, selling pressure in these assets this time around undermined the broader argument that they are reliable stores of value amid market volatility.

unstable currency

Stablecoin TerraUSD has been turbulent and broke its peg to the US dollar, bringing it down to 31 cents on Wednesday. On Thursday, it was trading at 47 cents. Read more

Stablecoins are digital tokens that are tied to the value of a traditional asset, such as the US dollar. But TerraUSD is an arithmetic stablecoin, or “decentralized,” that was supposed to maintain its peg to the dollar through a complex mechanism that involved exchanging it for another free-floating token.

Referring to other cryptocurrencies, Richard Asher, head of OTC trading at BCB Group, said: “The collapse of the TerraUSD peg has had some bad and predictable repercussions. We have seen massive liquidations in BTC, ETH and most ALT currencies.”

A representation of the cryptocurrency bitcoin is shown in this illustration taken on August 6, 2021. REUTERS/Dado Rovich

Even stablecoins backed by traditional assets were showing signs of fatigue on Thursday.

The cord fell unpegged to the dollar at 1:1, reaching 95 cents at around 0724 GMT Thursday, based on CoinMarketCap data.

“The lack of transparency Tether provides about the quality of the commercial paper they hold in support of the peg makes it the obvious next target,” said Usher of BCB Group.

“However, the tetra is a very different animal than the Terra, with a much more proven ecosystem and I have much greater confidence that when the volatility subsides, it can regain its binding and stability,” he said.

Tether’s chief technology officer, Paolo Arduino, 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.

Arduino said a quarterly update of Tether’s reserves will be available later in the month. Read more

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

The large number of centralized and decentralized crypto exchanges, each with its own liquidity and credit risk profile, was 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 partly driven by the fragmented nature of the market,” Vinokourov said.

“This credit risk, especially in times of tight liquidity and collective deleveraging, leads to further price distortions.”

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

In its semi-annual Financial Stability Report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor inflows because they are backed by assets that could lose value or become illiquid in times of market stress. Read more

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(Reporting by Alun John and Elizabeth Hawcroft in London); Additional reporting by Samuel Indyk. Written by Saikat Chatterjee; Editing by Clarence Fernandez, Bradley Perrett, Kim Coogill and Jane Merriman

Our Standards: Thomson Reuters Trust Principles.

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