By Elizabeth Howcroft and Samuel Indyk and Gertrude Chavez-Dreyfuss
LONDON/NEW YORK (Reuters) – The collapse of TerraUSD, one of the world’s leading stablecoins, rippled through cryptocurrency markets on Thursday, pushing another major stablecoin, Tether, below par with the dollar and sending bitcoin to record lows. of 16 months.
Cryptocurrencies have been swept up in a risky asset selloff, which has gained traction this week as data showed US inflation continues to advance, compounding investor fears about the economic impact of a possible aggressive rate tightening by the Federal Reserve.
The sale took the combined market cap of all cryptocurrencies to $1.2 trillion, less than half of where it was last November, according to data from CoinMarketCap.
Bitcoin hit a low of $25,401.05, the lowest since December 28, 2020. At 5:05 pm ET, the digital currency was quoted down 1.4% to $28,594.
In the past eight sessions, bitcoin has lost more than a quarter of its value, or about $10,700, down 37% so far this year. The peak was reached in November last year, at $69,000.
Bitcoin’s correlation with the Nasdaq index has been increasing recently and is now near its all-time high, based on data from Refinitiv. The Nasdaq is down about 8% so far this month.
Ether, the second most important cryptocurrency in the world, has dropped to its lowest since June 2021 at $1,700.
Unlike previous financial market sell-offs, when cryptocurrencies were almost flat, the latest selling pressure on digital currencies has undermined the broader argument that they are reliable stores of value amid market volatility. .
NOT SO STABLE
The TerraUSD stablecoin was hit by the turmoil and broke its peg to the US dollar, which caused it to drop to $0.31 on Wednesday. On Thursday, it was traded around 0.38 dollar.
“Unfortunately, the consequences of this situation go beyond the material losses suffered by investors,” said Anto Paroian, director of crypto hedge fund ARK36.
“Unlinking with parity is likely to result in substantial regulatory risk – if not to the entire cryptocurrency space, then certainly to the stablecoin market,” he said.
Stablecoins are digital tokens pegged to the value of traditional assets such as the US dollar. But TerraUSD is an algorithmic stablecoin and is supposed to maintain its parity with the dollar through a complex mechanism that involves exchanging it for another floating token.
This Thursday, Terra developers halted the blockchain to prevent attacks following the collapse of the stablecoin and related Luna token. However, Blockhain Terra has been restarted.
The non-profit Luna Foundation is an affiliate of Terraform Labs, the company behind TerraUSD.
Stablecoins backed by traditional assets also showed signs of stress. Tether has dropped below 1:1 parity with the dollar, based on data from CoinMarketCap.
“Tether’s lack of transparency about the quality of the commercial paper they hold to sustain parity has made it the obvious next target,” said Usher of the BCB Group.
“However, Tether is a very different animal from Earth, with a more proven ecosystem, and I have much more confidence that when volatility subsides, it will be able to regain its fixation and stability,” he said.
Paolo Ardoino, Tether’s chief technology officer, said the stablecoin has reduced exposure to commercial paper in recent months and now holds most of its reserves in US Treasuries.
Tether is the largest stablecoin by market cap and, along with USD Coin and Binance USD, accounts for nearly 87% of the $169.5 billion stablecoin market.
The sheer number of centralized and decentralized local cryptocurrency exchanges, each with their own liquidity and credit risk profile, is adding to price distortions across the market, said Denis Vinokourov, head of research at Corinthian Digital Asset Management.
“This risk, in times of tight liquidity and mass deleveraging, leads to further price distortions,” he said.
In its Financial Stability Report this week, the Federal Reserve said that stablecoins are vulnerable to investor runs as they are backed by assets that could lose value or become illiquid in cases of market stress.