Cryptocurrencies in Turbulence

They seem far away, the records of November 2021, when bitcoin was close to 70,000 dollars. Now it’s worth less than half. After several days of falling, the most popular cryptocurrency hit an overnight low Wednesday-Thursday at $25,424 before rising slightly. Other cryptocurrencies, such as ether, also fell.

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The tumble started in concert with the equity markets. Between persistent inflation, doubts about global economic growth and ambient uncertainty, the stock markets have been losing ground for several days. “This year, investors tend to reduce their risk. As cryptos are among the riskiest assets, selling them balances the profile of portfolios,” says Mads Eberhardt, cryptocurrency analyst at Saxo Bank. Since the beginning of this year, cryptocurrencies show a marked correlation with equities.

Dollar reserves

But now, the crypto tumble responds to issues of their own. “The terra crash at the start of the week shook the crypto markets,” Saxo Bank further underlines. This stablecoin, one unit of which must trade at a fixed rate of one dollar, has seen its value drop by almost half. Unlike other stablecoins, the terra issuer does not hold the dollars in reserve to guarantee its value. It’s an algorithm that’s supposed to do this by performing arbitrage that’s supposed to influence investors to buy or sell depending on the situation, bringing the price back to the desired level.

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“Many thought that this algorithm would not hold up in the long term, especially during difficult market conditions, since part of the collateral is tied to bitcoin. This means that the terra, and therefore the entire crypto market, is subject to systemic risk, potentially caused by the price of bitcoin”, continues Mads Eberhardt.

Less volatile

Stablecoins are used by investors to buy or sell cryptocurrencies without having to go through traditional currencies. Their course evolves according to the traditional currencies which they use as reference. They are therefore in principle not subject to the same volatility as bitcoin and other cryptocurrencies.

On Wednesday, a second, otherwise more significant stablecoin entered the turmoil. Tether, the largest in size of these currencies (80 billion dollars in capitalization, four times more than terra), fell to 0.96 dollars before rising again to 0.99 dollars. On Twitter, its technology manager, Paolo Ardoino, tried to reassure Thursday, pointing out that all refunds were made at one tether against one dollar.

It has been doubted for years that the issuer actually holds all of the dollar reserves, as it claims. Especially since it has never been very precise on the composition of the reserves and that it was amended last year by the American authorities (CFTC) for having made misleading statements on the state of its reserves. . For analysts, the setbacks of terra have certainly raised doubts surrounding tether, which explains its fall.

On Thursday, Paolo Ardoino added that tether will maintain convertibility “at all costs”, that there are “tons of US Treasury bonds” in its reserves which will be sold if necessary to maintain the value of the currency.

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