Turmoil and panic in crypto market as ‘stablecoin’ slump prompts wider collapse | Cryptocurrencies


Shockwaves swept through cryptocurrency markets on Thursday when tether, the largest “stablecoin” and a key part of the digital asset ecosystem, broke its bond to the dollar in the latest blow to the troubled sector.

Bitcoin and ethereum, the two largest cryptocurrencies, lost 5% and 12% respectively, extending the losses they saw both fall by more than 20% over the past week. Losses were even higher for smaller players, with dogecoin falling 10% on Thursday and 35% during the week.

The losses occurred when the tether was trading at less than $ 0.98 for the first time in two years on Thursday morning, leading it to reassure investors that it was still able to honor the pair’s withdrawals.

Like all stable currencies, the tether is designed to trade only at a fixed value relative to a conventional currency: a tether token is always assumed to be $ 1.

Questions and answers

What is a stable currency?

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A stable currency, as the name implies, is a type of cryptocurrency that is supposed to have a stable value, such as $ 1 per token. How they do this varies: the biggest ones, like Tether and USD Coin, are effectively banks. They have large reserves of cash, net assets, and other investments, and they simply use those reserves to maintain a stable price.

Others, known as “algorithmically stable currencies,” try to do the same but without reservation. They criticized that they are effectively backed by Ponzi schemes, as they require continuous cash inflows to ensure they do not collapse.

Stablecoins are an important part of the cryptocurrency ecosystem. They provide a safer place for investors to store capital without going through the hassle of fully collecting, and allow assets to be denominated in conventional currency, rather than other extremely volatile tokens.

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However, on Monday another stable currency, the earth, broke its link to the dollar and has fallen since then, now trading at just half its supposed stable value. This seems to have precipitated a wider collapse, with even blue-chip cryptocurrencies plummeting over the past week.

“There’s a clear sense of panic in the cryptocurrency space right now in the midst of the collapse of the stable currency,” said Neil Wilson of Finalto.

Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said: “The land incident is causing a panic in the industry, as land is the world’s third most stable currency.”

Bitcoin, the largest cryptocurrency, was trading at $ 29.368 on Thursday, giving it a total value of $ 562 billion, compared to its peak of more than $ 1 trillion last year.

The liquidation brought the combined market value of all cryptocurrencies to $ 1.2 trillion, less than half of what it was last November, according to CoinMarketCap data.

It has also reached crypto billionaires. The fortune of Changpeng Zhao, the founder of the Binance cryptocurrency exchange, fell by $ 84 billion to $ 4.5 billion this year, while Tyler and Cameron Winklevoss, co-founders of rival Gemini Exchange, lost more than $ 2 billion each. one this year.

Coinbase founder Brian Armstrong is now worth $ 2.2 million, up from $ 13.7 million in November last year, according to the Bloomberg Billionaire Index. Coinbase is suffering, and its shares have fallen 60% in the last five days.

It has been affected by the general collapse of the technology sector, the recession of the cryptographic collapse and its own problems. The company has caused panic among its users with a legally required disclosure that, if it goes bankrupt, customer deposits are not protected in the same way that bank deposits are.

The nervousness of the digital currency comes amid a broader slowdown in the US economy, with technology stocks falling and US inflation at 8.3%. However, unlike previous declines, where cryptography has largely followed weaknesses and broader recoveries, the near-total collapse of land, valued at $ 30 billion last week and now trading at less than $ 300 million, it caused a real panic that the sector could face existential problems. .

There are particular concerns about tether due to its key role in the financial engineering of much of the industry and the fact that it holds reserves in other cryptocurrencies, leading to fears of contagion collapsing.

Unlike land, which maintains its value through a complex algorithm, Tether is committed to ensuring that all its tokens are “100% backed” by its reserves, which were $ 80 billion in its latest December report. they include loans, precious metals, and investments in others. companies in the cryptographic sector.

In theory, the tether should never trade below $ 1: as long as it does, there is a guaranteed benefit from commercial arbitrators willing to buy the token at a discount and return it to the tether, who agrees to buy it at full value.

However, since the landslide there has been so much sales rush across the industry that the market value of the tether has dropped to 95 ¢ before recovering. Public records show that at least one major redemption removed nearly $ 350 million from reserves.

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As bailouts increase, the company may be forced to apply for loans from other cryptocurrency companies, which in turn causes them to suffer financially. And if it collapses completely, large parts of the industry will simply stop working, as they rely on the mooring token to keep prices stable against the US dollar.

In a statement, the Tether company said it was “as always in the midst of the expected market panic” and that it had processed $ 2 billion in withdrawals. That represents about half of the cash the company has.

Its technology director, Paolo Ardoino, said: “Tether is pleased that the market continues to show its confidence and trust in Tether: the first, largest and most transparent, innovative and liquid stablecoin. We are a rapidly evolving industry and as an industry we will learn from these events together. “



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