Eliminating $1.9 Trillion in Crypto Risks Spreading to Stocks and Bonds – Tether Stablecoin in the Spotlight

The cryptocurrency market has lost $1.9 trillion six months after hitting an all-time high. Interestingly, these losses are larger than those witnessed during the subprime mortgage market crisis of 2007: around $1.3 trillion, which has raised fears that the risk of the crypto market spilling over into traditional markets, hurting stocks and bonds alike.

Crypto market cap weekly chart. Source: TradingView

Stablecoins are not very stable

A massive downward move from $69,000 in November 2021 to around $24,300 in May 2022 in the price of Bitcoin (BTC) has sparked a selling frenzy across the entire crypto market.

Unfortunately, the bearish sentiment hasn’t even spared stablecoins, the so-called crypto equivalents of the US dollar, which haven’t been able to stay as “stable” as they claim.

For example, TerraUSD (UST), once the third-largest stablecoin in the industry, lost its peg to the dollar earlier this week, falling to a low of $0.05 on May 13.

UST/USD daily price chart. Source: TradingView

Meanwhile, Tether (USDT), the largest stablecoin by market cap, briefly fell to $0.95 on May 12. But, unlike TerraUSD, Tether managed to recover to close to $1, mainly because it claims to support its dollar peg using good traditional methods. reserves, including real dollars and government bonds.

Cryptocurrency contagion risks

But that’s where the trouble started, according to a warning issued by rating agency Fitch last year. The agency feared that Tether’s rapid growth could have implications for the short-term credit market, where it has a large pool of funds, according to the company’s reserve breakdown disclosure.

If traders decide to dump their Tether, the most popular dollar-pegged stablecoin in the cryptocurrency sector, for cash, it would risk destabilizing the credit market in the short term, Fitch noted.

The credit market is already struggling under the weight of higher interest rates. Tether could further push it lower as it holds $24 billion in commercial paper, $35 billion in Treasury notes, and $4 billion in corporate bonds.

The signs are already visible. For example, Tether has been drawing down its commercial paper holdings during the crypto correction over the past six months, its chief technology officer Paolo Ardoino confirmed on May 12.

So, based on Fitch’s warning last year, many analysts fear that the “financial run” will soon spread to the traditional market.

That includes Joseph Abate, managing director of fixed income research at Barclays, who believes that Tether’s decision to sell its commercial paper and certificates of deposit before maturity could mean paying several months of interest as a penalty.

As a result, they could be forced to sell their liquid Treasury bills, which represent 44% of their net holdings.

Related: What happened? Terra debacle exposes flaws plaguing the crypto industry

“We don’t know what’s going to happen, but the danger cannot be ruled out immediately,” says Robert Armstrong, author of the Financial Times newsletter Unhedged, adding:

“Stablecoins have a total market cap of over $150 billion. If all the pegs break, and they could, there will be ripples far beyond crypto.”

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