Bitcoin fell and the world’s largest stable coin, the tether, briefly withdrew from its fixed value of $ 1, adding to fears of more turbulence in the cryptocurrency market.
Cryptocurrencies were hit by two forces this week. On the one hand, fears that inflation will force the central bank to tighten have suppressed the desire to hold assets that are perceived as higher risk. On the other hand, the release of TerraUSD, a stable coin with a value of $ 1, sent waves through digital assets.
Bitcoin fell below $ 25,402.04 on Thursday, down 10% from its 17:00 ET on Wednesday, its lowest level since December 2020, before recovering to about $ 28,600, according to CoinDesk. Bitcoin fell in the last seven consecutive days until Wednesday – its longest losing streak since March 2020, according to Dow Jones Market Data. Ether fell 4.8 percent from Wednesday night to $ 1,933.85 on Thursday, its lowest level since July 2021.
Cryptocurrencies have come under pressure in recent days along with stock markets. Digital assets are increasingly keeping pace with stocks as traditional money managers, such as hedge funds and family offices, enter the space in the last two years, analysts say. Such funds may be more likely to sell cryptocurrencies during periods of volatility than to hold them.
Shares fell on Wednesday as inflation turned out to be more sticky than economists had expected, raising fears about how much the Federal Reserve might need to tighten financial conditions to curb inflation. Investors are worried that the aggressive increase in interest rates may weigh on growth, which is already a problem with the blocking of Covid-19 in some Chinese cities and the war in Ukraine.
Crypto was also affected by the removal of the binding of what was previously the third largest market value, Stablecoin. Charged as the most volatile part of the cryptocurrency, these assets are tied to the value of government-issued currencies. Stablecoin TerraUSD has broken away from its fixed dollar in recent days, reaching 61 cents at 8:20 a.m. ET on Thursday.
His sister token, Luna, is trading at 3 cents, down 99% from the previous 24 hours. The decline puts its value below that of the joke cryptocurrency dogecoin, which is traded at about 8 cents at a time.
Bitcoin fell to $ 25,402.04 on Thursday.
Photo: Umit Turhan Coskun / Zuma Press
While the most popular stablecoins maintain their asset levels, which include dollar-denominated debt and money, TerraUSD is what is known as an algorithmic stablecoin that relies on financial engineering to maintain its relationship with the dollar.
In the past, TerraUSD has maintained its $ 1 price by relying on retailers to act as its safeguard. When it fell under the lock, traders would burn the stablecoin – removing it from circulation – by exchanging TerraUSD for new Luna units worth $ 1. This action reduced the supply of TerraUSD and increased its price.
Conversely, when the value of TerraUSD rose above $ 1, traders could burn Luna and create a new TerraUSD, thus increasing the supply of stablecoin and lowering its price back to $ 1.
This system stopped stabilizing the cryptocurrency after a series of large withdrawals of TerraUSD from the Anchor Protocol, something like a decentralized bank for crypto investors. At the same time, TerraUSD was sold for other stable coins through various liquid pools, which contribute to the stability of the fixation. The sudden influx of sales frightened some traders, who intensified the defeat.
Markets seem to be increasingly volatile: stocks, bonds and cryptocurrencies are falling as investors struggle to manage the large fluctuations that are shaking financial markets around the world. WSJ’s Caitlin McCabe looks at some of the reasons behind the recent market frenzy. Photo: Spencer Platt / Getty Images
The break in TerraUSD also raised fears that other stable coins could deviate from their typical levels. Tether, the largest stable coin by market value, fell to 96 cents around 3:15 a.m. ET before recovering to 99.3 cents at 8:20 a.m., according to CoinDesk. Some hedge funds have stepped up betting that tether could jump $ 1 in recent days, investors say.
In the past, regulators checked the stable coin for which the parent company Tether Holdings Ltd. says it is backed by reserves of money or other financial instruments, being too opaque.
It took a long time for a New York Attorney General to investigate and possibly settle allegations of $ 18.5 million that Tether was misleading customers so Tether could reveal what he owned in general quarterly through his accounting firm. These holdings consist of investments such as cash and short-term US government securities, but also short-term long-term liabilities known as trading securities.
Tether does not disclose which companies own the trading papers, which leads to some investor concerns about the quality and stability of these companies. Tether said earlier that she had deliberately reduced her trading papers following an agreement with the New York Attorney General.
“Tether is the most liquid stablecoin on the market and is 100% supported by a strong, conservative and liquid reserve portfolio. “Tether has endured a number of black swan events in the cryptocurrency,” a Tether spokesman said, adding that the company continued to handle purchases normally amid the current cryptocurrency sell-off.
Finance Minister Janet Yellen reiterated her calls to Congress to allow the regulation of so-called stablecoins.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
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