Why did Tether lose his position?
The sudden and brief collapse in the price of Tether’s stablecoin came just like any other cryptocurrency, a hard sell-off.
Tether’s hesitation is worrying because it is theoretically linked one-to-one to the dollar with a package of fiat assets. Like a country that protects its currency from devaluation, the issuing company (Tether Limited) can buy Tether tokens with fiat money to maintain the price of the token.
During the “crypto winter” of 2018, the grouse traded at low prices of 91 cents for several days. But it has recovered, and it has helped to strengthen the belief that while cryptocurrency is volatile, it is resilient and ultimately tending to recover. Crypto enthusiasts assure everyone that this latest sale is a repeat of 2018.
However, Tether Limited refuses to fully disclose the Fiat assets it holds, so it is impossible to assess the sustainability of the fixation. Regulators are worried about a wave of Tether buyouts.
Running Tether would be particularly dangerous because it is essential to the overall liquidity of the crypto market. This is the main environment for moving back and forth between crypto assets and dollars. Its failure could bring the entire crypto ecosystem to its knees.
As one of the founders of dogecoin said, “If Tether dies, it’s over.”
Concerns were heightened by the fact that another cryptocurrency, TerraUSD, also melted this week. Although TerraUSD also calls itself a stable coin, it has little to do with Tether other than the $ 1 target. Instead of being backed by dollar assets, this is an “algorithmically stable coin.” Here’s how it works:
Terra has an analogue of cryptocurrency called Luna.
A system of smart contracts allows traders to exchange Luna for $ 1 (at market prices) for one Terra token or one Terra token for Luna for $ 1.
If Terra is overpriced at $ 2, you buy one Luna for $ 1, exchange for one Terra, and sell Terra for $ 2.
If a Terra is undervalued at 50 cents, you buy a Terra for 50 cents, exchange it for Luna for $ 1.
Therefore, if there are enough purchases and sales, Terra should stay close to $ 1.
The system relies on an active market, which in turn requires traders to believe that they will not get stuck at a loss. If everyone is soaked in TerraUSD at once, the whole thing falls apart. The fragility of this system has long been obvious to close crypto observers. Here’s Nevin Freeman, co-founder of Stablecoin Reserve, who predicts exactly what happened in 2020:
I think the biggest risk for stablecoins is if there is an algorithmic stablecoin that doesn’t have support, that just has an algorithmic mechanism. That is to keep it stable. . . . One of them can be launched and put on the market very effectively and be significantly accepted. . . . If this protocol then explodes economically and the price falls by half or close to zero, [you may have] a regulatory response.
Yesterday, the bad mood from the TerraUSD fiasco put pressure on Tether sales, although the main mechanisms are very different. But the whole mess is focusing on spillover effects for traditional markets. There was speculation yesterday that the crypto-collapse could ruin retail investor sentiment, strike stocks, spark a rally in asylum assets such as government securities or destabilize short-term funding markets.
The danger cannot be thrown out of control. Stable coins have a total market capitalization of over $ 150 billion. If everyone collapses — and they could — there will be waves far beyond the crypto.
Dealer Anatoliy Pavlov
Varchev Absolute Trader
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