Cryptocurrencies: falling prices and growing concerns about stablecoins

The massive price drops in the cryptocurrency markets continued. Bitcoin was down about 10 percent from the previous day and hit its lowest level in a year at just under $ 27,000. Ethereum is down nearly 20%, falling below $ 2000 for the first time this year; the hourly rate is around 1900 US dollars.

Other currencies fell even more heavily, such as Solana by around 30%, Ripple and Cardano by around 25%. The Coinmarket analysis service currently estimates the total value of the cryptocurrencies registered at 1,220 billion US dollars. On Tuesday, the value was around US $ 1.44 trillion.

Basically, such crashes are not uncommon in very volatile cryptocurrency markets. The development of one of the so-called stablecoins is much more drastic. Notably, the fourth stablecoin TerraUSD and the associated coin Luna, behind which the company Terraform Labs is located, collapsed.

Stablecoins are cryptocurrencies that set their price at another value, such as the US dollar. A unit of the currency must therefore always be worth one US dollar. One way to achieve this is to hold adequate reserves. The TerraUSD concept also contains reserves, but mainly provides for the stablecoin to find stability through incentives for smooth exchange movements on the Moon coin and mutual adjustments of the money supply. The concept is called algorithmic binding.

Over the weekend, this got out of balance and now both coins have plunged into the abyss together: Luna is now worth $ 0.05; a week ago the price was still above 80 US dollars. TerraUSD fell to US $ 0.3 overnight and has plummeted by around US $ 0.5 since then – you can no longer talk about reliable dollar parity here.

The Terraform Labs behind the project and their boss Do Kwon have announced various countermeasures. Whether it will bear fruit remains to be seen. An earlier Do Kwons design was a similar algorithmically linked coin called Basis Cash, according to Coindesk; the currency is now trading for less than one US cent and is therefore considered an abandoned project.

Now the concern in the cryptocurrency scene is whether other stablecoins could go haywire as well. The DAI, issued exclusively via decentralized protocols and backed by cryptocurrency collateral, showed only minor deviations from the dollar. The USDC, which claims to be backed by US dollars and short-term bonds, has also essentially maintained its par. A lesser known coin such as the USD Neutrino, which also relies on algorithmic dollar pegs, has been wiped out with values ​​around US $ 0.8 and sometimes even lower.

Above all, however, the largest stablecoin Tether is in focus, which effectively acts as a substitute for the dollar on numerous exchanges. Tether rebounded as low as $ 0.95 early in the morning, but has since returned to around $ 0.98. Tether has long been criticized and targeted by regulators for its lack of transparency on reserves that should form equivalent value.

Tether boss Paolo Ardoino pointed out to Cointelegraph that such volatility has been overcome. Unlike algorithmic currencies, Tether is backed by a “strong, conservative and liquid portfolio” of cash and equivalent instruments such as short-term government bonds and commercial paper with good credit ratings. Users can redeem their tether for US dollars at any time.

It remains to be seen whether the decline in the cryptocurrency market will cause more stablecoins to drop. “It remains to be said that confidence in stablecoins has generally been massively damaged. The image of an entire industry has been mistreated,” cryptocurrency analyst Timo Emden assessed the situation for Handelsblatt.

In any case, US Treasury Secretary Janet Yellen has already stressed the urgency of introducing regulation for stablecoins by the end of this year ahead of the TerraUSD fall, reports the financial news agency Bloomberg. According to the report, the US Federal Reserve has warned of the risks of such stablecoins, for example if they were used as collateral for leveraged transactions.


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