Tether stablecoin is in the spotlight

The cryptocurrency market has lost USD 1.9 billion six months after reaching a record. Curiously, these losses are greater than those recorded during the 2007 subprime mortgage market crisis, around 1.3 trillion, which has raised fears that cryptocurrency market risk will spread to traditional markets, hurting both stocks and to bonuses.

Cryptocurrency market capitalization weekly chart. Source: TradingView

Stablecoins are not very stable

A massive move down from $69,000 in November 2021 to around $24,300 in May 2022 in the price of Bitcoin (BTC) has sparked a selling frenzy across the cryptocurrency market.

Unfortunately, the bearish sentiment has not even spared the stablecoinsthe so-called crypto equivalents of the US dollar, which have not been able to remain as “stable” as they say.

For example, TerraUSD (UST), once the third largest stablecoin in the industry, lost its peg to the dollar earlier this week, falling to a low of $0.05 on May 13.

UST/USD daily price chart. Source: TradingView

Meanwhile, Tether (USDT), the largest stablecoin by market cap, fell briefly at $0.95 on May 12. But unlike TerraUSD, Tether managed to rally to close to $1, not least because it claims to back its peg to the dollar with the usual reserves, including real dollars and government bonds.

Contagion risks of cryptocurrencies

But that’s where the trouble starts, according to a warning issued by ratings agency Fitch last year. The agency feared that Tether’s rapid growth could have implications for the short-term credit market, where it has plenty of funds, according to the firm’s reserve breakdown released. here.

If traders decide to dump their Tether, the most popular stablecoin in the cryptocurrency sector, for cash, they risk destabilizing the credit market in the short term, he pointed Fitch.

Cryptocurrency losses now amount to $1.7 trillion. The 2007 subprime mortgage market was $1.3 trillion.

Cryptocurrencies are very likely to be the catalyst for an accelerating global collapse.

The weekend risk is HIGH.

The credit market is already struggling under the weight of higher interest rates. Tether could push further downside as it holds $24 billion in commercial paper, $35 billion in Treasuries and $4 billion in corporate bonds.

The signs are already visible. For example, Tether has been reducing your paper reserves during the correction of cryptocurrencies in the last six months, as confirmed by its chief technology officer, Paolo Ardoino, on May 12.

So, based on Fitch’s warning last year, many analysts fear that the “financial run” will soon spread to the traditional market.

Among them is Joseph Abate, managing director of fixed income research at Barclays, who believes that Tether’s decision to sell its commercial paper and certificate deposits before maturity could result in the payment of several months of penalty interest.

Consequently, it could be forced to sell its liquid Treasury bills, which make up 44% of its net holdings.

“We don’t know what’s going to happen, but the danger cannot be ruled out outright,” thinks Robert Armstrong, author of the Financial Times newsletter Unhedged, adding:

“Stablecoins have a total market capitalization of over $150 billion. If all pegs are broken – and they could be – there will be repercussions far beyond cryptocurrencies.”

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.

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