The crash of UST has led many investors to stop thinking that stablecoins can protect the value of money. The reduction in the market capitalization and the liquidity of Tether (USDT) might also lead it to collapse.
Considerable disruptions have occurred in the crypto market due to the collapse of Terra (LUNA) and the stablecoin TerraUSD (UST). At its zenith, the Terra network became one of the leaders of the crypto revolution. Investor panic now moves to Tether (USDT), the most prominent stablecoin in the market.
After the price of LUNA and UST plummeted, Tether has suffered an outflow of more than USD 9 billion. That reduction in the capitalization of USDT could pose a risk to the overall crypto market.
Many investors used to see stablecoins as a relatively safe store of value in the crypto market. However, recent events have made it clear that they cannot protect the value of money.
The reserves and collateral of Tether, amid much controversy, are likely to be the target of regulators. They have not fully audited its funds and has not provided clear information even after losing its parity to the US dollar.
Some of the Advantages of Stablecoins
Amid the collapse of the overall crypto market, stablecoins have behaved quietly through limited volatility. When the market capitalization of Bitcoin and other cryptocurrencies dropped, that of stablecoins gained prominence.
Stablecoins allow investors to react to price changes and buy cryptocurrencies more quickly. The role of some of those pegged cryptocurrencies has expanded, allowing their holders to earn additional passive income.
Reserves of fiat currencies like the US dollar or the Swiss franc serve to back most of the stablecoins in the market. However, it is not only cash but also a variety of other assets such as company-issued short-term debt securities.
There is Controversy over Some Stablecoin Projects
Algorithmic projects like TerraUSD (UST) rely on a trading code that creates demand and supply to maintain their value. The convergence of the collapse of Terra and the growing uncertainty about Tether is putting pressure on USDT. The latter has lost its 1:1 parity with the US dollar several times over the last two weeks.
The recent drops in prices have drawn attention back to the reserves of Tether. When the platform last disclosed its funds, cash represented around USD 4.2 billion of its assets. Most of them (USD 34.5 billion) consisted of unidentified treasury bills with maturities below three months, while USD 24.2 billion was debt securities.
The decrease in liquidity of Tether, its shrinking capitalization, and widespread loss of confidence in it might lead it to collapse. However, USDT is still the leading stablecoin with the most cryptocurrencies listed.
Paolo Ardoino, the CTO of Tether, refused to disclose security features, citing privacy concerns after the price of USDT dropped to USD 0.95. The computer scientist also threatened to sell reserves in US government bonds to defend the centralized token.
By Alexander Salazar
