Will stablecoins drag down the whole cryptocurrency market?

The spectacular collapse of the Terra (Luna) project and associated stablecoin UST created caused strong perturbations in the entire crypto market. Not surprisingly, Terra in its heyday held the place of one of the leaders of the electronic revolution.  Now panic has shifted to the network's largest stablecoin, Tether.

• Since the crash on cryptocurrency Luna and stablecoin TerraUSD, Tether has registered an outflow of over $9 billion. Tether's shrinking capitalization could potentially pose a threat to the entire cryptocurrency market.

• Stablecoins seemed to be treated as a relatively 'safe haven' in the crypto market, however after  recent events, it has become clear that they cannot act as a safe store of value.

• Tether's reserves and collateral have been subject of many controversies in the past, and now it is almost certain that they will come under regulatory radar .

• Tether has repeatedly refused to fully audit its reserves and even after it lost its peg with the dollar, no clear information were provded.

Stablecoins - an oasis of calm? 

Stablecoins during cryptocurrency market declines have so far acted in a calm manner through limited volatility. Because of this when Bitcoin and other cryptocurrencies were falling, stablecoin capitalization wass gaining powerfully. Stablecoins allow investors to react quickly to price changes and enables quick purchases of cryptocurrencies. Recently, the function of stablecoins has been expanded and for some of them holders can earn additional 'passive income'. 

Most stablecoins on the market are backed by reserves of fiat currencies such as the US dollar or the Swiss franc. However, this is not only hard cash, but also a range of other assets - including short-term debt securities issued by companies (which raises concerns about the safety of such reserve deposits).

Controversy over projects

Alternatives to traditional stablecoin include algorithmic projects such as TerraUSD (UST), which rely on a trading code that creates demand and supply around itself to maintain the currency's value. The convergence of Terra's collapse and the growing uncertainty surrounding Tether is putting pressure on the USDT, which has lost its 1-to-1 correlation with the U.S. dollar multiple times within the last two weeks. 

Recent declines again brought the topic of Tether's reserves into the spotlight. When Tether last disclosed its reserves, cash represented about $4.2 billion of its assets. The vast majority - $34.5 billion - consisted of unidentified Treasury bills with maturities of less than three months, while $24.2 billion was debt securities.

Tether's declining liquidity, shrinking capitalization, and widespread loss of confidence in this stablecoin could lead to its collapse. Tether still remains the leading stablecoin with the largest number of cryptocurrencies listed to it. 

Paolo Ardoino, Tether's Chief Technology Officer refused to disclose the security features, citing privacy issues after Tether's price collapsed and fell to $0.95. At the same time, Ardoino threatened to sell reserves in US government bonds to defend the token. In the past, the cryptocurrency has come out of every slump unscathed, and problems with the correlation to the dollar were extremely rare and were quickly fixed. Tether survived recent declines and is positively correlated with the US dollar.

Excerpt from an audit report of Tether's reserves conducted by mhaCayman Agency. Date of preparation: December 31, 2021 Source: Tether

Tether's market capitalization has fallen by more than $9 billion since Luna's crash. Source: CoinMarketCap