September 25, 2022

Crypto Volatility Brings down More Stablecoins

Stablecoins are now facing the consequences of major volatility in the crypto market, while previously being considered a safe haven, as investors are pulling money out of them. Therefore, a number of stablecoins have lost their peg to the underlying assets. On Thursday, the market capitalization of stable coins plummeted from $181 billion to $156.8 billion, as per the latest statistics. The former value had been calculated in the beginning of May.

Major Stablecoins Down

The largest stablecoin in the world, Tether fell on Wednesday briefly to reach $0.993, but it managed to regain parity with the US dollar. Market analysts said that the market capitalization of stable coins changes with the liquidity and sentiment in the crypto space. Therefore, they said it was definitely a concern that USDT was experiencing another round of liquidations.

The digital asset markets have been thrown in the turmoil of late, with crypto lending platform Celsius announcing that it was temporarily freezing transfers and withdrawals. This came on the heels of the implosion of the TerraUSDstablecoinin the previous month. Plus, monetary conditions are being tightened all over the world and this is taking away the appeal of investing in risky assets, like cryptocurrencies.

Crypto tokens that are pegged to the value of real-world assets like the US dollar are referred to as stablecoins. They are often used for moving funds into cash or across tokens because they are not very volatile. Moreover, funds that provide arbitrage services between geographies and exchanges also use stable coins and bet on those that are quoted below par marginally.

Tether has wiped out its market capitalization by $5 billion in 30 days, over worries about its reserve assets and Celsius’s exposure to the stablecoin. Analysts said that there were signs that Tether would end up with some bad loans because of the crypto lender. But, its market cap is still in excess of $70 billion, so it will not be substantial.

Algorithmic Stablecoins also Suffering

TerraUSD was an algorithmic stablecoin, which stands out because they control its token supply via a complex mechanism to continue maintaining its peg. But, with its fall, other algorithmic stablecoins have also had to pay the price. Tron, a smart contract platform, launched the USDD, which is also an algorithmic platform. In terms of market cap, it is at the ninth spot.

On Monday, the stablecoin lost its peg to the US dollar and went as low as $0.96 at one point. Justin Sun, the founder of Tron, stepped in and said that more than $2 billion would be invested for protecting the peg of the stablecoin. He said that the positions would not even last for 24 hours.

The reserves for the stablecoin are the responsibility of Tron DAO. On Wednesday, it announced that in order to support the stablecoin’s peg, they would remove 2.5 billion of the tokens available on the Binance crypto exchange. But, USDD still did not succeed in regaining its peg and was the last trading at a value of $0.976.

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