Cryptocurrencies are experiencing black weeks right now. Now the whole system is threatened by a crisis of confidence in so-called stablecoins.
Cryptocurrency prices have continued to fall over the last few days. With $ 24,000, Bitcoin today reached its lowest level in about 16 months. In the last 24 hours alone, the crypto market has lost almost 15 percent of its total value.
$ 1.25 trillion is still being invested in cryptocurrencies, compared to $ 3 trillion in November, a loss of $ 1.75 trillion or $ 1.7 trillion.
In addition to falling prices, however, there is still more trouble ahead. Because another pillar of crypto trading is shaking. The so called stablecoins no longer seem to live up to their name and threaten to permanently damage the trust of the entire cryptosystem.
Stablecoins make crypto trading easier
stablecoins, i.e. “stable coins” must be pegged 1: 1 to a currency, usually the US dollar. So a unit of a stablecoin is always worth a dollar, regardless of fluctuations in the crypto market as a whole, according to the concept.
Stablecoins are especially useful for frequent trading and speculation with multiple cryptocurrencies. Profits can be temporarily parked here and should not be converted into fiat currencies such as dollars or francs – which will usually be associated with fees and often the tax authorities call the plan.
Third largest stablecoin collapses
The third largest stablecoin to date was TerraUSD, with nearly $ 18 billion deposited here. But over the weekend, many investors withdrew their TerraUSD in the wake of the general downturn in the crypto markets. Since TerraUSD is supposed to be pegged to the US dollar, this should have had no effect on the price, a TerraUSD should still have been worth one dollar.
On Monday, however, wild price fluctuations began at TerraUSD, which in fact can only be expected from ordinary cryptocurrencies. In some cases, a TerraUSD was only worth 30 US cents, but the volatile stable coin has currently been able to save around 45 US cents. However, anyone who invested their money in a cryptocurrency that they thought corresponded to a bank account denominated in US dollars should get an unpleasant surprise.
TerraUSD focuses on arbitrage
TerraUSD works a little differently than the other two major stack coins on the market, Tether and USDC – more on that later. It relied on an algorithm and market participants to maintain the bond to the dollar. In principle, the focus was on arbitrage, a centuries-old financial market practice that ensures that an identical security always costs about the same on different exchanges.
Thanks to arbitrage, for example, you can buy an Apple share on the Zurich Stock Exchange and on the New York Stock Exchange at almost exactly the same price, because if the price differences were greater, arbitrage traders would immediately buy Apple shares on one. stock exchange on a large scale to sell them to the other.
Now, at TerraUSD, arbitrage is working with a related cryptocurrency called Luna, issued by the same operating company, the Luna Foundation Guard. As the owner of a TerraUSD, you have the right to exchange it for a Luna equivalent to one US dollar. So if TerraUSD was worth less than a dollar, arbitrage traders would buy it up en masse, swap it for Luna and then for US dollars, thus supporting the TerraUSD exchange rate again. That’s the theory.
Hyperinflation is also found in crypto
Now, however, Luna is a common cryptocurrency. And these are only worth something because people think they are worth something. A month ago, Luna was worth $ 119. Today, that’s 4 cents, or $ 0.04, down 99.9 percent. Meanwhile, lots of new luna were created, i.e. hyperinflation as it was in Germany during the Weimar Republic or in Zimbabwe and Venezuela in modern times.
Of course, this is not a sustainable solution in the long run. The Luna Foundation Guard and the driving force behind both currencies, South Korean crypto investor Do Kwon, now want to use their Bitcoin reserves to support TerraUSD as well as attract external investors, but it is doubtful whether these plans will succeed.
Concerns about other stack coins
The collapse of TerraUSD also raises concerns about other stack coins. Tether and USDC do not rely on algorithms and the market to secure the US dollar affiliation, but instead claim that their stablecoins are backed by non-crypto-world assets, such as real US dollars or corporate and government bonds.
Reports in mainstream media like “Bloomberg” have repeatedly raised serious doubts as to whether stablecoin operators really have enough reserves to cover all of their circulating coins. The crypto community did not seem to care so much, the trust was there.
Tether also loses dollar binding
But now you are probably not so sure anymore. Tether was at times only worth about 95 cents this morning, but has since been at 98 cents. Not as dramatic a crash as with TerraUSD, but also no longer really coupled with the US dollar: the fixed exchange rate has never been so far away from a dollar.
Unlike previous crashes in the crypto market, of which there were numerous and which at the time were often followed by rapid price increases, there is now concern about the stability of the entire system – probably similar to the financial crisis in 2007/08. With a system that is based almost exclusively on beliefs, as cryptocurrencies are, this can be fatal.