Cryptocurrency News

Tether’s Stablecoin Peg Breaks as Bitcoin Plunges to $27,000

By May 12, 2022 No Comments

Key takeaways:

  • The total cryptocurrency market cap has decreased by over 15% to $1.22 trillion in the last 24 hours
  • Bitcoin slipped to the $27,000 price level on a 10% negative change, while Ethereum and other altcoins plummeted by over 20%
  • The selling pressure has seen the largest stablecoins, Tether’s USDT, losing its $1 peg

Tether loses its $1 peg amidst a broader market sell-off

The sell-off in the cryptocurrency markets sparked by macroeconomic drivers such as rising interest rates and high inflation, as well as yesterday’s Terra collapse, have shaken the peg of the world’s largest stablecoin, Tether’s USDT.

According to CoinCheckup data, USDT dropped to $0.9691 earlier on Thursday, which means that the third largest market cap digital currency was trading over 3 percentage points removed from its intended $1 peg. USDT has reapproached its one-dollar peg by press time and is currently changing hands at $0.9879. 

It is worth noting that there could be some discrepancies in price data between different tracking sites. TradingView for instance shows that USDT dropped as low as $0.9490 earlier today.

The market pullback has left virtually no digital asset unaffected – Bitcoin is trading in the $27,000 to $28,000 range, its lowest price level since December 2020. Altcoins are performing even worse – Ethereum, BNB, XRP, Solana, and Cardano are all down more than 20% each in the last 24 hours. 

Bitcoin 7-day price chart.

Yesterday’s sudden collapse of the Terra ecosystem, which saw LUNA drop from $60 to below $1 and UST trading as low as 70% removed from its stablecoin peg, had a profoundly negative effect on crypto as a whole. The total cryptocurrency market shrunk by over 15% to $1.22 trillion as people were trying to exit their positions in large numbers. 

What could Tether’s collapse mean for crypto?

At its highest point, UST had a market capitalization of over $18 billion (now $6.9 billion). In terms of market cap, USDT is a much bigger player in the sector, with an $82 billion valuation. However, the market capitalization figure, in a way, undersells how important USDT is for the whole crypto ecosystem. 

USDT is used across virtually all crypto exchanges as a primary trading pair for digital assets. It provides liquidity for the majority of decentralized finance (DeFi) services and ensures large sums of funds can be moved between crypto products, services, and networks without incurring losses due to price volatility. 

Due to its outsized presence in the sector, USDT regularly tops the charts of most traded crypto assets, with its daily trading volume often surpassing the combined volume of Bitcoin and Ethereum. If it were to collapse, it would very likely tank the whole cryptocurrency market, and UST’s downfall would seem minuscule in comparison.

Tether losing its $1 peg is not an isolated occurrence

Today’s de-pegging of USDT is not the first time that the largest stablecoin had problems maintaining the $1 price. Shortly after it started trading in 2015, Tether hit its lowest price point of $0.57. At the time, low demand for the stablecoin and low liquidity resulted in high price fluctuations. Case in point, USDT traded as high as $1.32 at one point in 2015.

In October 2018, USDT’s peg dropped to $0.95 amidst a broader market crash that saw Bitcoin lose over 50% of its value during the month. In May 2019, USDT’s price fell to the $0.94 level due to concerns of Bitfinex–a company behind USDT–not having enough funds in Tether reserves. After a coalition of prominent traders bailed out Bitfinex with a $1 billion investment, the trust in Tether was reestablished and the stablecoin re-pegged.

Unfortunately, the concerns about Tether reserves were never put to rest. The company issuing USDT, Tether Limited, claims 100% of its stablecoins are backed by cash and liquid assets that will ensure USDT can withstand even the worst bear market conditions. However, the company has been accused of not being transparent about its reserves in the past and settled with the New York attorney general in a lawsuit that accused Tether Limited of not having sufficient backing for USDT.