Crypto market collapse widens as tether drops below dollar peg

Crypto market collapse widens as tether drops below dollar peg

In the latest blow to the struggling cryptocurrency market, the world’s largest stablecoin, tether reportedly broke its peg to the US dollar. Tether supposedly forms a foundational part of the global ecosystem of digital assets.

For the uninitiated, stablecoins are cryptocurrencies that have a ‘stable’ value relative to an established currency. USD coin and tether, two of the largest stablecoins, maintain a stable price by holding large reserves of cash, liquid assets, or other investments.

One tether token is supposed to maintain its value at US$1.00.

Even two of the biggest cryptocurrencies, Ethereum and Bitcoin, have fallen by as much as 12% and 5% respectively, garnering losses as they register over 20% decline over the last week. Other cryptocurrencies have also suffered major losses as dogecoin, which fell 10% on Thursday, saw a 35% drop in value in the past week.

This is the first time that tether traded below $0.98, prompting its investors to doubt whether the company that issued it, Tether Limited, was still capable of fulfilling withdrawals at par.

During the start of the week, terra, another major stablecoin, had broken its peg to the US dollar and continued to decline, currently trading at half of its supposed value. This seemed to have triggered a further crash in the market as even blue-chip cryptocurrencies plunged over the last week.

With tether having a foundational role in much of the sector’s financial engineering, as well as the holding reserves in other cryptocurrencies, many raised concerns of contagion if the stablecoin collapses. The firm’s total reserves were $80 billion, as per a December report, and included precious metals and loans, along with investment in other crypto firms.

With a huge selloff across the crypto market after terra’s collapse, the market value of tether dropped to $0.95 for a brief period. Public records indicate that at least one large redemption took out nearly $350 million from tether’s reserves.

According to data from CoinMarketCap, the combined market value of all cryptocurrencies reached $1.2 trillion due to that, which is less than half of what it was in November last year.

Tether itself processed withdrawals worth $2 billion, nearly half of its on-hand cash reserve.

Source credit: https://www.theguardian.com/technology/2022/may/12/stablecoin-tether-breaks-dollar-peg-cryptocurrencies