This illustration shows a representation of the cryptocurrency Bitcoin.

Crypto meltdown deepens as stablecoin Tether drops below dollar peg

HONG KONG/LONDON, May 12 (Reuters) – The meltdown in TerraUSD, one of the world’s largest stablecoins, sent shockwaves through the cryptocurrency markets on Thursday, pushing another stablecoin Tether below the dollar peg, pushing bitcoin to a 16-month low. sent to levels.

Cryptocurrencies were swept away by a selloff in high-risk assets that gained momentum this week as data showed US inflation soaring and investors deepened fears over the economic impact of aggressive central bank tightening.

The sale brought the combined market value of all cryptocurrencies to $1.12 trillion, about a third of 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 cap, dropped to $25.401.05 on Thursday, its lowest level since December 28, 2020. In the last eight sessions, it has lost almost a third of its value, or about $13,000, and has fallen. More than 45% so far this year.

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

Bitcoin’s correlation with the Nasdaq composition (.IXIC) has been on the rise recently and is close to an all-time high according to 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 level since June 2021.

Unlike previous financial market selloffs, with cryptocurrencies largely untouched, the selling pressure on these assets this time has undermined the broader argument that they are reliable stores of value amid market volatility.

NOT SO STABLECOIN

Stablecoin TerraUSD was hit by the turmoil and broke its peg to the US dollar, causing it to drop as low as 31 cents on Wednesday. It was trading around 47 cents on Thursday. read more

Stablecoins are digital tokens pegged to the value of traditional assets such as the US dollar. But TerraUSD is an algorithmic or “decentralized” stablecoin and is supposed to sustain it through a complex mechanism that involves exchanging the dollar stable for another free-floating token.

“The crash of the stabilizer in TerraUSD has had some nasty and predictable spreads. We’ve seen extensive liquidation in BTC, ETH and most ALT coins,” said Richard Usher, head of OTC trading at BCB Group, referring to other cryptocurrencies.

A representation of the cryptocurrency Bitcoin is seen in this image taken on August 6, 2021. REUTERS/Dado Ruvic

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

Tether fell as low as 95 cents around 0724 GMT on Thursday and dropped below its $1:1 fixed point, according to data from CoinMarketCap.

“The lack of transparency provided by Tether about the quality of the commercial papers they hold to support the stabilizer has made it the next target,” said Usher of BCB Group.

“However, Tether is a very different animal than Terra, which has a more proven ecosystem, and I have much more confidence that when volatility declines, it can regain its constancy and stability,” he said.

Tether’s chief technology officer, Paolo Ardoino, said in a Twitter Spaces chat that the stablecoin has reduced its exposure to commercial papers over the past six months and now holds most of its reserves in US Treasuries.

Ardoino said a quarterly update on Tether’s reserves will be available later in the month. read more

Tether is the largest stablecoin by market cap, and together with USD Coin and Binance USD they make up almost 87% of the total $169.5 billion stablecoin market, according to CoinMarketCap.

According to Denis Vinokourov, head of research at Corinthian Digital Asset Management, multiple centralized cryptocurrency exchanges and decentralized venues, each with their own liquidity profile and credit risk, were contributing to market-wide price distortions.

“The spillover effects to other stablecoins are partly due to the fragmented nature of the market,” Vinokourov said. Said.

This credit risk leads to more price distortions, especially during periods when liquidity conditions are tight and collective leverage is removed.”

Market players are still evaluating the effects of TerraUSD on investors.

In its biennial Financial Stability Report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor moves as they are backed by illiquid assets that can depreciate in times of market stress. read more

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reporting by Alun John and Elizabeth Howcroft in London; additional reporting by Samuel Indyk; Post by Saikat Chatterjee; Editing Clarence Fernandez, Bradley Perrett, Kim Coghill and Jane Merriman

Our Standards: Thomson Reuters Trust Principles.

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