Crypto Analytics

What Happens in Crypto May Not Stay in Crypto This Time

Crypto creaks. Unfortunately, those fund managers in regular markets like stocks and bonds who have carefully avoided focusing on this freewheeling asset class also need to beware.

A trickle down from a peak above $68,000 in bitcoin price has turned into a flood, in part because of cracks in the so-called stablecoins — a misnomer if there ever was one — that are gluing the market together. Right now the price has dropped to around $27,000.

Yes, crypto bros, before you email me (again) your all-caps letters, I am aware that some people are still busy with their investments. It is entirely plausible that the market can recover from this, as it has from numerous previous challenging episodes.

Say what you like about crypto, it has a dedicated fan base and impressive staying power. But everyone who got in after late 2020 is now under water, and the drivers of this decline appear to be structural. Even some who have drunk Kool-Aid accept that this time may be different.

So who cares? Well, it’s sad for people, often young and of meager means, who ignored all warnings and poured their life savings into frisky cryptocoins, lured by claims that these lines of code could become serious rivals to the dollar and the basis of a new financial utopia. It’s uncomfortable for the boosters trying to convince institutional investors that bitcoin is a hedge against inflation, which it clearly isn’t. El Salvador’s crypto-fanatic President Nayib Bukele may need to be demoted his big plans from Bitcoin City to Bitcoin Town.

The open question is whether all of this matters to traditional markets that are already suffering from wobbles of their own. Will it move stocks and bonds?

Usually what happens in crypto stays in crypto. But big moves can prevail. A regulatory crackdown from China almost exactly a year ago triggered a fleeting 30 percent plunge in bitcoin prices, leaving German bond watchers puzzled as they watched their market rallied on a flight to safety.

One banker tells me that his hedge fund clients are now watching closely, with several taking seriously the possibility that a major crypto crash, if it happens, could support the most important market of all, US Treasuries, again believing that being the case would prompt a rush to safer places to park cash.

So the question is, are we headed for a repeat of last year’s 30 percent crash? Signs that Tether is under pressure add to the sentiment that this price drop could be The Big One. The stablecoin, which acts almost like a central bank for the crypto market, has seen cracks in its dollar peg after a much smaller stablecoin, TerraUSD, went into meltdown earlier this week. The two tokens work differently, but the nuance is largely the narcissism of small differences. Either these things can maintain a one-to-one peg with the dollar, or they can’t. If they can’t, then the belief system underlying crypto is in trouble.

Tether may also matter to broader markets through another channel. Its dollar peg is not maintained by algorithmic magic like TerraUSD. Instead, it claims to secure its link with the dollar with good old-fashioned reserves. Details of exactly what is in these reserves are sparse and not subject to generally accepted accounting standards. But theoretically they amount to $80 billion, which is the amount of Tether tokens in circulation.

Last year, rating agency Fitch warned that if Tether holders fold and try to convert their tokens into real money, it could destabilize short-term lending markets, where the company says it holds a lot of funds.

“The rapid growth in stablecoin issuance could have implications for the functioning of short-term credit markets over time,” Fitch analysts said, citing “potential asset contagion risks related to the liquidation of stablecoin reserves.”

Credit markets are already faltering under pressure from an upward shift in interest rate benchmarks. The notion that, when push comes to shove, Tether could sell parts of its alleged $24 billion stash of commercial paper, $35 billion hoard of U.S. Treasury bills, or $4 billion stash of “corporate bonds, funds and Precious Metals” in these market conditions may not be helpful.

Now would be a good time for Tether to be more explicit and up to date on what’s in the box. This would help investors understand where the weaknesses lie and allay concerns about its support.

Paolo Ardoino, Tether’s chief technology officer, said in a Twitter chat on Thursday that the group is ready to “maintain the peg to the US dollar at all costs.” He said Tether recently bought “a ton” of US Treasuries and is willing to sell them to defend the token.

Debt investors already battered after what has been a turbulent year so far should be on the lookout.

katie.martin@ft.com


Source: Crypto News Austria

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