Bitcoin’s correlation with the Nasdaq composite has been on the rise recently and is now up near its all-time highest level, based on Refinitiv data. The Nasdaq composite has tumbled around 8 per cent so far this month.
Ether, the world’s second-largest cryptocurrency, fell to its lowest since June 2021, sinking as low as $US1,700.
Unlike previous financial market sell-offs, when cryptocurrencies have been largely untouched, the latest selling pressure in digital currencies has undermined the broader argument that they are dependable stores of value amid market volatility.
Stablecoin TerraUSD has been hit by the turmoil and broke its peg to the US dollar, which led to it falling as low as 31 cents on Wednesday. On Thursday it was trading around 38 cents.
“Unfortunately, the fallout from this situation goes beyond the material losses sustained by investors,” said Anto Paroian, chief operating officer at crypto asset hedge fund ARK36.
“The de-pegging will likely result in a substantial regulatory risk – if not for the whole crypto space, then certainly for the stablecoins market.”
Stablecoins are digital tokens pegged to the value of traditional assets, such as the US dollar. But TerraUSD is an algorithmic, or “decentralised”, stablecoin, and was supposed to maintain its dollar peg through a complex mechanism which involved swapping it with another free-floating token.
On Thursday, Terra developers halted the network’s blockchain to prevent attacks following the collapse of its algorithmic stablecoin and the related Luna token. The Terra blockhain, however, has since restarted.
The non-profit Luna Foundation is an affiliate of Terraform Labs, the company behind the TerraUSD.
Even stablecoins backed by traditional assets were showing signs of stress on Thursday.
Tether slipped below its 1:1 dollar peg, hitting a low of 95 cents around 6pm AEST on Thursday, based on CoinMarketCap data.
Paolo Ardoino, Tether’s chief technology officer, said in a Twitter Spaces chat that the stablecoin had reduced its exposure to commercial paper over the last six months and now holds the majority of its reserves in US Treasuries.
Tether is the largest stablecoin by market cap, and, along with USD Coin and Binance USD, they account for almost 87 per cent of the total $US169.5 billion stablecoin market, according to CoinMarketCap.
The large number of centralised cryptocurrency exchanges and decentralised venues, each with their own liquidity profile and credit risk, was adding to price distortions across the market, Denis Vinokourov, head of research at Corinthian Digital Asset Management, said.
“The spillover effects into other stablecoins is in part driven by the fragmented nature of the market,” Vinokourov said.
Market players are still assessing the impact of TerraUSD’s troubles on investors.
In its biannual Financial Stability Report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become illiquid in times of market stress.
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