The crypto market demonstrated more instability on Thursday as Tether, the largest stablecoin and a fundamental part of the digital asset ecosystem, dropped below the dollar.
The two largest cryptocurrencies, Bitcoin and Ethereum, have lost 5% and 12%, respectively, both with losses in excess of 20% over the past week. .
Tether, like all stablecoins, is intended to be traded only at fixed prices compared to traditional currencies. One Tether token is typically fixed at $1. However, another well-known stablecoin (the world’s third largest), Terra, also dropped below the dollar earlier this week, now trading at just half the expected stable value. This appears to have caused a broader crypto crash, including blue-chip cryptocurrencies. Bitcoin, the largest cryptocurrency, traded at $29,368 on Thursday, totalling $562 billion, compared to more than $1 trillion at its peak in 2021.
Based on CoinMarketCap data, the selloff brings the total market value of all cryptocurrencies to $1.2 trillion, less than half compared to November 2022.
Digital currency concerns continue to rise as the US economy declines, with tech stocks deteriorating and US inflation at 8.3%. Unlike prior downturns, where cryptocurrencies demonstrated wider weaknesses and recoveries, Terra valued at $30 billion last week and now trading at less than $300 million has caused panic in the crypto sector. Furthermore, Tether is of particular concern due to its fundamental role in financial engineering in the sector. Tether reportedly holds reserves in other cryptocurrencies, which may lead to additional risks.
In contrast to Terra, which maintains its value through complex algorithms, Tether claims that all of its tokens are 100% backed by its reserves, which were worth $80 billion including loans, precious metals, and investments in other crypto sector companies as of their December 2021 report.
However, since the collapse of Terra, sales have skyrocketed across the sector, and Tether's market value has fallen to 95 cents before recovering. According to public records, at least one major redemption has removed nearly $350 million from the reserves. Increased redemptions can force the company to request loans from other crypto companies, resulting in financial distress. And if it collapses completely, most of the industry reportedly simply stops working because it relies on Tether tokens to stabilize prices against the US dollar.
Tether said in a statement that it was "business as usual amid some expected market panic", and processed $2 billion worth of withdrawals, representing approximately half of the company's cash.
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