The risk of stablecoins for the traditional market can’t be ignored because of Tether’s vulnerability towards the U.S. financial system.
The market for cryptocurrency has lost $1.9 trillion in the past six months, just after it reached an all-time high. Incredibly, the losses are greater than those experienced during subprime mortgage market crisis in 2007 which was around $1.3 trillion. This has raised concerns that the market risk in the crypto space could spill over into traditional markets, harming both bonds and stocks.
Stablecoins are not stable.
A dramatic drop to $69,000 from November 20, 2021 down to about $24,300 by May 2022 in the Bitcoin’s (BTC) cost has led to an upswing in the cryptocurrency market.
The bearish outlook has not spared stablecoins or crypto-equivalents that are a subset of that of the U.S. dollar, which aren’t in the same way as “stable” as they claim.
As an example, TerraUSD (UST), was once the third largest stablecoin in the sector has lost the peg to dollar earlier in the week, and dropped the low of $0.05 on the 13th of May.
While Tether (USDT) is the largest stablecoin in terms of market capitalization it briefly dropped to $0.95 on the 12th of May. But , unlike TerraUSD, Tether managed to return to its former levels of near $1, mostly because it claims it backs its dollar peg with old-fashioned reserves, which include real dollars and bonds of the government.
Crypto spillover risks
This is where the problem begins as per a warning issued by the rating agency Fitch in the year 2000. Fitch was concerned that Tether’s explosive growth could impact the credit market for short-term loans which is where Tether holds large amounts of money, as per the breakdown of reserves for the company, which is available here.
If the traders decide to trade their Tether which is the most popular stablecoin that is pegged with dollars in the crypto space in exchange for cash, they could risk weakening the credit market in the short term, Fitch noted.
Today, the crypto losses amount to $1.7 trillion. The subprime mortgage market in 2007 stood at $1.3 trillion.
It’s very likely that Crypto could be the trigger for an acceleration of global devastation.
Weekend risk is HIGH. pic.twitter.com/4Ewo73uTeg
– — Mac10 (@SuburbanDrone) on May 12 2022
It is clear that the credit markets are being squeezed by rising interest rates. Tether could push it to lower its levels as it has the equivalent of $24 billion in commercial papers, 35 billion of Treasury notes and the value of $4 billion in corporate bonds.
Already, the signs of trouble are evident. For instance, Tether has been reducing its reserves of commercial paper as a result of the crypto correction over the past six months its Chief Technology Officer, Paolo Ardoino, confirmed on May 12.
Based on Fitch’s prediction last year, some analysts worry of the “financial run” might soon be a threat to the traditional market.
This is Joseph Abate, managing director of research on fixed income at Barclays He believes that the decision of Tether to sell its commercial paper and certificate deposit portfolios prior to maturity could result in the payment of some months of interest as penalties.
This means that they may be required to dispose of the liquid Treasury bills that comprise 40% of their total holdings.
Related: What transpired? Terra’s debacle exposes the flaws plaguing the cryptocurrency industry
“We do not know what is going to happen, but the danger cannot be dismissed out of hand,” declares Robert Armstrong, the author of the Financial Times’ Unhedged newsletter and adds:
“Stablecoins have a total market capitalization of more than $150 billion. If the pegs all break — and they could — there will be ripples well beyond crypto.”