The meltdown in TerraUSD, one of the world’s largest stablecoins, sent shockwaves through cryptocurrency markets on Thursday, pushing another major stablecoin, Tether, below its dollar peg and sending bitcoin to 16-month lows.
Cryptocurrencies have been swept up in a sell-off across higher-risk assets, which has picked up steam this week as data showed US inflation running hot, deepening investor fears about the economic impact of aggressive central bank tightening. The sell-off has taken the combined market value of all cryptocurrencies to $1.2 trillion (€1.16 trillion), less than half of where it was last November, based on data from CoinMarketCap.
Bitcoin, the largest cryptocurrency by market cap, hit a low of $25,401.05 on Thursday, its lowest level since late December 2020, before recovering slightly later in the session to trade flat on the day as European markets closed. In the past eight sessions it has lost more than a quarter of its value, or around $10,700, and is down 37 per cent so far this year, trading far below the peak of $69,000 it hit in November 2021.
Bitcoin’s correlation with the Nasdaq composite has been on the rise recently and is now up near its all-time highest level, based on Refinitiv data. The Nasdaq composite has tumbled around 8 per cent so far this month. Ether, the world’s second-largest cryptocurrency, fell to its lowest since June 2021, sinking as low as $1,700. Unlike previous financial market sell-offs, when cryptocurrencies have been largely untouched, the selling pressure in these assets this time around has undermined the broader argument that they are dependable stores of value amid market volatility.
Stablecoin TerraUSD has been hit by the turmoil and broke its peg to the dollar, which led to it falling as low as 31 cents on Wednesday. On Thursday it was trading around 47 cents. Stablecoins are digital tokens pegged to the value of traditional assets, such as the US dollar. But TerraUSD is an algorithmic, or “decentralised”, stablecoin, and was supposed to maintain its dollar peg via a complex mechanism which involved swapping it with another free-floating token.
“The collapse of the peg in TerraUSD has had some nasty and predictable spillovers. We have seen broad liquidation in BTC, ETH and most ALT coins,” said Richard Usher, head of OTC trading at BCB Group, referring to other cryptocurrencies. – Reuters
