Cryptocurrency roundup: “stablecoin” instability provokes a wider crypto-crash

What a week it was for the cryptocurrency market – a bloodbath, to put it mildly. Views on cryptocurrencies  fall into two camps –  those who love it and hold it for the long-term (hodlers), and those who hate it. There is rarely any middle ground.  

Perhaps those who piled into stablecoins over the last few years thought investing in a cryptocurrency that said it was backed by the US dollar represented some sort of security, and nothing could go wrong.  

But, they couldn’t have been more wrong. TerraUSD and Tether, the world’s largest stablecoins, both broke away from the US dollar this week which wreaked havoc for cryptocurrencies and at one point wiped out all of bitcoin’s 2021 gains.  

Here are the top stories that caught our eye.  

TerraUSD and tether stablecoins break their dollar peg  

A stablecoin is a type of cryptocurrency which is “pegged” to another asset – usually the US dollar. The point is to offer a form of cryptocurrency whose value can be relied upon. So you get the benefits of cryptocurrencies, such as they are, but combined with a stable (or at least predictable) value. 

TerraUSD was unusual in that it was backed not by actual US dollars, but by an algorithm. The algorithm was supposed to adjust the supply of terraUSD in order to keep its value pegged to that of the US dollar. It did this via a sister token, “luna”. 

The trouble with this is that traders can swap $1 worth of luna for one unit of the sister cryptocurrency.  

As Liam Proud points out on Reuters Breakingviews: “if the value of terra falls below $1, traders have an incentive to swap it for $1 worth of luna, banking a profit and reducing the supply of Terra until the price recovers”.  

This is exactly what happened when investors lost faith in luna. As such the terraUSD stablecoin which was supposed to be pegged at a value of $1, crashed to as low as 0.0003 this week.  

And, worse yet, on Thursday tether, the world’s most popular stablecoin appeared to succumb to a similar fate – it crashed to as low as $0.94 on Thursday as fears reverberated throughout the cryptocurrency market.  

The fall was the steepest in more than a year. For now, USD coin, the world’s second biggest stablecoin has held up.  

Jeffrey Halley, senior market analyst at OANDA, warns that the rout in stablecoins could spread to other asset classes too, warning that Things could “get ugly fast and may lead to cross-margining selling in other asset classes.” 

Bloodbath for cryptocurrency markets  

The trouble for digital currencies was not confined to stablecoins as several other cryptocurrencies, including bitcoin and ether, crashed with the former falling below to below $26,000 for the first time since late 2020.  

Bitcoin recovered on Friday to just above $30,000 at the time of writing. The $30,000 mark is seen as a significant support level – the fact that it has been breached means further falls are likely.  

But it is worth noting that cryptocurrencies were experiencing a volatile week even without the stablecoin scares.  

As recently as a few months ago, cryptocurrencies were branded as a hedge against inflation in a world where prices are rising everywhere, with inflation around 8.3% in the US and 7% in the UK.  

But as central banks turned more hawkish, tech stocks crashed, and cryptocurrencies followed suit.  

Coinbase spells out what a bankruptcy would mean for users’ crypto holdings  

In more bad news for the sector, cryptocurrency exchange Coinbase posted disappointing first-quarter earnings results this week. The cryptocurrency exchange posted a quarterly loss of $430m and reported an almost 20% fall in monthly users.  

Coinbase’s shares are down around 50% due to a combination of the poor results and a rare warning to customers which said that their crypto may be at risk in the event that the exchange goes bankrupt.  

According to a regulatory filing, cryptocurrencies held in custody for users “could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors”. 

Coinbase’s CEO tried to reassure investors their money is safe, saying “there is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. TL;DR: Your funds are safe at Coinbase, just as they’ve always been.”  

But questions persist about the overall health of the cryptocurrency ecosystem.  

Markets

Here’s what happened to five of the largest cryptocurrencies by market cap in the last seven days: 

• Bitcoin is down 21.4% to $29,053.
• Ether is down 28.7% to $1,966.
• Tether is down 0.3% to $1.
• USD Coin is flat at $1.00. 
• Binance Coin is down 28% at $274.

What you need to watch out for

It is worth watching out for regulation on stablecoins. US Treasury secretary Janet Yellen reopeated calls this week to regulate the stablecoin industry.  

Ashley Alder, chair of the International Organisation of Securities, said cryptocurrencies, Covid-19 and climate change are core areas of focus right now.  

Alder added that the world needs a group that can focus on cryptocurrencies, akin to one that already exists for climate change.  

"There isn't anything like that for crypto at the moment,” Alder said.  

“But I do think now it's seen as one of the three C's (COVID, climate and crypto) so it's very, very important. It has gone up the agenda, so I would not expect that to be the case at the same time next year,” he added.