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Tether and TerraUSD, two of the most renowned stablecoins, have fallen below the mark of $1 and have been below it since early in May 2022, so this raises the question: Is this the end for stablecoins?
For your information, A stable coin is a cryptocurrency whose value is pegged to another asset class like fiat currency or gold to stabilize its price. Crypto markets are not regulated (yet), so the market is extremely volatile. Stablecoins assist investors by shielding them from extreme volatility.
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Tether is one of the most popularly used cryptocurrencies on the crypto market and is a stablecoin. It is a dollar-backed cryptocurrency i.e. it is pegged against the US Dollar, which was launched in 2014. It is not decentralized, it is issued and destroyed by its managing company of the same name to manage demand and supply. TerraUSD is also a stablecoin, launched in 2020, but it is not pegged to the US Dollar, it relies on financial engineering to maintain its link to the dollar.
Being stablecoins deriving value from the US Dollar, these currencies are supposed to trade at around $1. Prior to May 2022, both coins traded around the same. TerraUSD had higher ranges as it would trade almost a cent higher at times while Tether showed minimal movement.
However, from 8th May 2022, the stablecoins began declining as both fell below $1. While Tether saw a low of $0.96, TerraUSD's decline was a lot sharper as it fell over 90%. Today, Tether is priced around $0.9992 while TerraUSD currently trades around $0.01636, down more than 99% in a month.
After declining, the market cap of Tether has fallen from $83.21 billion to $72.49 billion today. On the other hand, TerraUSD's market cap, which had peaked at $18.73 billion early in May, is left at $168 million currently. This has left investors with billions in losses as faith in stablecoins is shaken.
The break in the peg, which began over the weekend, started with a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors. In tandem with the big withdrawals, TerraUSD was also being sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges.
The dislocation of TerraUSD from its peg caused some traders to panic and sell. The same happened with Tether as panicked investors sold their holdings. Moreover, TerraUSD had to sell out a majority of its crypto holdings in an effort to maintain the stablecoins value with the US Dollar, causing other cryptocurrencies to decline as well.
The deviation of Tether and TerraUSD from the Dollar added to the fears of rising inflation and dire geopolitical conditions have dampened investors' risk appetite and shifted their focus away from cryptocurrencies. Only time will tell if these coins can recover their image as stablecoins.
Article by Aman Agarwal.
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