Recently, Bitcoin, the key indicator for the cryptocurrency industry, suffered losses. There has been a lot of blame on stablecoins.
In December 2022, Bitcoin fell to a level not seen since December 2020, dropping to $25,402 a 52-week low. Although the price of the "digital gold" has since increased, as of the time of this writing, it was still trading at about $30,000.
Due to causes including inflation, rising interest rates, and the war in Ukraine, the price of cryptocurrencies and the value of the global stock market have declined since the start of 2022. But could it be something more? Is something pointing towards a stablecoin crash?
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What are Stablecoins?
In the cryptosphere, stablecoins exist in several varieties. A stablecoin aims to provide a digital asset that is "safer” to invest into and maintains a stable valuation, as its name suggests.
Stablecoins are valued at the price of another thing, most typically a fiat currency like the U.S. dollar. The pegged value of the stablecoin should remain constant.
One stablecoin should always be worth $1 under a dollar peg, regardless of what is happening in the overall market.
The third-largest cryptocurrency by market capitalization is the stablecoin Tether (USDT). The U.S. dollar is the common currency for USDT and USD Coin (USDC) — another stablecoin. When you invest $10 in USDT, you expect it to be worth the same amount in a year.
According to Cyrus Younessi, former Head of Risk Management at stablecoin minter at MakerDAO, "a decentralised stablecoin is the Holy Grail of DeFi." Although unpredictable, cryptocurrencies can free money from governmental and financial bureaucratic control. "If you could take those assets, extract stability out of them, and productise it, then that's significant," he continued. But this, however, may need to be more practical.
Terra (LUNA) is Crashing
LUNA was designed to protect TerraUSD from market volatility, but it was severely sold off over the fourth quarter. At the time of this writing, its trading price was under $0.03, or fractions of a penny. That is down 99.9% from the weeks leading up.
According to Adam Carlton, CEO of cryptocurrency wallet PinkPanda, "It was inevitable Terra fell as the reliance on using other cryptocurrencies as collateral as well as the minting/burning method of LUNA for Terra was not sufficient to sustain any substantial market turbulence."
The Luna Foundation Guard (LFG), a charity organisation that supports the Terra network, spent all $3 billion of its reserve of Bitcoin in December 2022 to save TerraUSD. And the fund's desperate attempt to salvage UST by selling off its Bitcoin deposits is likely what contributed to Bitcoin's volatility.
Even though TerraUSD may be on its way out, there is always hope for the future of the cryptocurrency sector. The events of the last quarter of 2022 were a result of contagion, according to Ric Edelman, Founder of the Digital Assets Council of Financial Professionals and author of "The Truth About Crypto."
According to Edelman, "people sell indiscriminately at times of panic." Intelligent investors will soon realise that this is absurd and that there is a great purchasing opportunity. Edelman anticipates a quick increase in the values of Bitcoin and Ethereum. He believed that the current state was almost unavoidable because too many people invested in TerraUSD without considering how the system indeed functioned.
The Stablecoin Future
Following the collapse of TerraUSD, Tether and other stablecoins are being closely scrutinised. Remember that USDT is intended to be backed by U.S. dollar assets, and as of this writing, USDT has an $82 billion market cap.
Crypto experts, Bitsoft 360, studied this and mentioned that the company that manages Tether does not have $82 billion to support its currency.
The market recently put this theory to the test. During Asian trading hours, USDT fell to $0.97 and momentarily lost its peg to the U.S. dollar. Although it has bounced back to $0.997349, USDT still lags behind the 1-to-1 USD parity, raising concerns about its long-term viability.
As one stablecoin is riskier than one dollar, participants in the cryptocurrency market anticipate some slippage — one USDT is likely to be valued slightly less than one dollar. However, it just takes a few pennies to blow the market's confidence in a stablecoin.
Collateralised stablecoins are the future, the market is demonstrating to us plainly, according to Andrew Pesco, Domain Money's head of investment management.
Despite all the damage caused by the Terra foundation's careless handling of stablecoins, the industry will rise to the challenge and increase market resilience. U.S. Treasury Secretary Janet Yellen became aware of TerraUSD's unravelling and raised the prospect of stablecoin laws when it became clear that TerraUSD was in a crisis and that a framework was required to mitigate the dangers. There is little doubt, according to Edelman, that more regulation is required to safeguard investors. Crypto is ever-changing, and nothing but speculations can stand, with the upcoming months sharing the truth.