Stablecoin Terra’s Broken Dollar Parity Hits Broader Crypto Markets

A bank of cryptocurrency miners operates at the Scrubgrass Plant in Kennerdale, Pennsylvania, U.S., March 8, 2022. REUTERS/Alan Freed

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HONG KONG, May 10 (Reuters) – TerraUSD, one of the world’s largest stablecoins, lost a third of its value on Tuesday, spooking crypto investors and in part contributing to Bitcoin falling below levels. $30,000 for the first time in 10 months.

Stablecoins are digital tokens pegged to the value of traditional assets, such as the US dollar. They are popular as safe havens in times of turmoil in the crypto markets and are a common medium of exchange, often used by traders to move funds and speculate on other cryptocurrencies.

TerraUSD, also known as ‘UST’, is one of the so-called algorithmic stablecoins, one of the largest by market cap. On Tuesday, it broke its 1:1 parity with the dollar and fell as low as 67 cents, according to pricing site CoinGecko.

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The token rose to prominence earlier this year when the Luna Foundation Guard, a non-profit organization affiliated with Terraform Labs, the company behind TerraUSD, pledged to amass $10 billion worth of bitcoin to support its peg to the dollar.

By Tuesday afternoon, TerraUSD had recovered slightly to 91 cents and ranked as the world’s 10th largest cryptocurrency by market cap, according to CoinGecko.

Unlike other stablecoins that hold reserves in traditional assets, TerraUSD maintains its peg through an algorithm that moderates supply and demand in a complex process that involves the use of another balancing token, Luna. read more

Luna Foundation Guard said in a tweet on Monday that it would defend TerraUSD’s dollar peg through $1.5 billion in loans to OTC trading firms, half in bitcoin and half in TerraUSD.

Luna Foundation Guard and Terraform Labs could not be reached for comment.

Justin d’Anethan Institutional, director of sales at Amber Group, said the use of bitcoin as a reserve had created a vicious cycle for TerraUSD, with selloffs in both tokens pushing the other lower.

“Bitcoin is falling as it is being sold to defend an ecosystem that is suffering, the ecosystem that is suffering is creating even more panic in (TerraUSD), which is weighing on the Luna token, which requires the foundation to use more reserves to supplement and defend the peg”, he added.

“It’s not a fun situation to be in.”

In its semi-annual Financial Stability Report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that may lose value or lose liquidity in times of market stress. .

“Furthermore, the increasing use of stablecoins to meet margin requirements for leveraged trading in other cryptocurrencies may amplify volatility in demand for stablecoins and increase redemption risks,” it added.

CRYPTO NERVOUSNESS

Stablecoins as an asset class have generally benefited from market volatility in the crypto markets. Three stablecoins are now in the top 10 cryptocurrencies by market cap, with TerraUSD in 11th place.

Other major stablecoins such as Tether and USDC say they are backed by real assets and therefore not vulnerable to the same issues that have plagued TerraUSD.

But the cryptocurrency market in general has been affected in line with the declines in traditional financial markets.

Bitcoin dipped below $30,000 early Tuesday for the first time since July 2021, weakening along with other traditional “risk-off” assets such as tech stocks, but also hurt by the TerraUSD sell-off.

The world’s most widely used cryptocurrency also rallied slightly on Tuesday afternoon to $31,272, according to Coingecko.

These declines in the face of weakening risk appetite counter the view of some cryptocurrency enthusiasts that cryptocurrencies are a store of value, similar to gold. read more

Bitcoin has lost more than half its value since hitting an all-time high of $69,000 in November 2021.

Analysts at Singapore’s QCP Capital said in a note that while Bitcoin currently held at a key support level, “there is material tail risk from (TerraUSD) de-pegging coupled with macro concerns.”

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Reporting by Alun John in Hong Kong, additional reporting by Elizabeth Howcroft in London and Michelle Price in Washington; Edited by Sam Holmes, Louise Heavens and Richard Chang

Our standards: the Thomson Reuters Trust Principles.

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