The cryptocurrency market is experiencing a major crash. Faced with this situation, stablecoins, cryptocurrencies whose value corresponds to the value of the dollar, are collapsing. .
On Thursday, the value of the UST stablecoin fell to $0.4. The collapse, which is explained by anomalous volumes. If in the case of UST all this seems to be the result of a scam or an attack on the network, then other stablecoins are also shocked by the collapse of bitcoin. Very high trading volumes have resulted in major stablecoin prices varying significantly.
One thing sets UST apart from other stablecoins. UST is indeed based on an algorithmic model. Unlike classic stablecoins, so-called “algorithmic” stablecoins are regulated by algorithms and backed by digital assets such as Bitcoin or Luna in the case of UST. These algorithms can reduce the circulation of a stablecoin in order to increase its value if it ever needs to be adjusted. Therefore, they create new tokens if the need arises.
Other stablecoins use reserves of cash, gold, and digital assets as collateral. Of these, Tether is the best known and by far the most widely used. Theoretically, they cannot face such a sharp drop in price as UST. However, on Friday, Tether briefly lost parity with the dollar, hitting $0.95.
On Thursday, Tether briefly lost parity with bitcoin.
This is due to the high volume of transactions. The fall in the price of bitcoin triggered a massive sell-off among some investors fearful of the potential crash, and conversely, a wave of compulsive buying with 10 times the usual buying volumes. In situations like this, some traders tend to bet on bitcoin movements using leverage. Specifically, they can increase their winnings by 500%, 1000% or even up to 10000% by betting on a deal. Risky bets that naturally lead to the bankruptcy of some of them. Specifically, when one of these deals goes wrong, it’s called a liquidation. On Thursday, the volume of these liquidations exceeded one billion dollars. All assets of the specified trader are sold to compensate for the registered loss. And, of course, volumes in Tether and other stablecoins are skyrocketing.
USDC is currently the stablecoin that has best kept its stability.
However, on Twitter, Tether’s CTO wanted to reassure investors. He announced to his token holders that the company had enough cash reserves to handle the situation. Paolo Ardoino tweeted: “[Un] a reminder that Tether honors redemption [de Tether] for $1 – $300 million bought back in [les] the last 24 hours, without a drop of sweat.”
However, it should be remembered that stablecoins are not owned by states or central banks. They are run by independent companies that are not very transparent in their activities. While USDT seems safe enough, the UST case reminds us that nothing is guaranteed. If the UST were to collapse completely, there would be no guarantee that its holders would ever get their money back. Therefore, it is recommended to be careful not to leave eggs in one basket.
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