Bitcoin Could Mark Record Low Run After Stablecoin Collapse

Cryptocurrencies reduced losses this Friday (13), with bitcoin returning to operation above $ 30,000, but still registering a record sequence of drops after the collapse of the TerraUSD stablecoin, which shook the cryptocurrency markets.

Digital assets suffered a strong sequence of losses driven by risk aversion from investors, worried about rising inflation and rising interest rates. Confidence in the sector is shaken as dollar-pegged tokens also retreated.

Bitcoin rose 5.5% at 12:22 pm (Brasília time), to US$ 30,464 (R$ 155,500), staging a recovery from the previous drop, when it reached a level of around US$ 25,400. (R$ 129.7 thousand).

The coin, however, remains far below last week’s levels of around $40,000. Unless there is a rally in weekend trading, bitcoin is set to post a record seventh straight weekly drop.

“I think the worst is not over,” said Scottie Siu, chief investment officer at Axion Global Asset Management, a Hong Kong firm that manages a cryptocurrency index fund.

“I think there are more dips coming in the next few days. I think what we need to see is more interest in the collapse, so speculators are really going to come out. That’s when I see the market is really going to stabilize,” he added.

Cryptocurrency-related stocks plummeted. In Asia, Hong Kong-listed Huobi and BC, which operate trading platforms and other digital currency services, saw weekly declines of more than 20%.

The sell-off has nearly halved the value of the global cryptocurrency market since November, and the slump turned into panic in recent sessions as the impact began to be felt by stablecoins.

Stablecoins are tokens pegged to the value of traditional assets, often the US dollar, and are the primary means of moving money between cryptocurrencies or converting wallet balances into fiat money.

Cryptocurrency markets have been rocked this week by the collapse of TerraUSD (UST), which crashed breaking the 1:1 parity with the dollar.

UST’s complex stability system, which involves balancing the free-floating cryptocurrency Luna, stopped working when Luna came under selling pressure. UST was trading earlier this afternoon at $0.1941 according to CoinMarketCap. Luna was close to zero.

Tether, the largest stablecoin and described by developers as pegged to dollar assets, was also facing pressure and retreating below $1, according to CoinMarketCap.

“For these types of stablecoins, the market needs to be confident that the issuer holds enough liquid assets that they will need to sell in times of market stress,” analysts at Morgan Stanley said.

The company that operates Tether says it has the necessary assets in the form of US Treasuries, as well as cash, corporate bonds and other capital market products.

But Tether is likely to face further stress tests if traders keep selling and analysts are worried the move could be transmitted to the capital markets if pressure forces more liquidations.

Rating agency Fitch said in a note on Thursday that there could be “significant negative repercussions” for cryptocurrencies and digital finance if investors lose confidence in stablecoins.

“Many regulated financial market entities have increased exposure to cryptocurrencies, decentralized finance and other forms of digital assets in recent months and some groups tracked by Fitch could be affected if crypto market volatility becomes severe.”

But Fitch said this week that weak links between cryptocurrency markets and regulated financial markets will limit the potential for cryptocurrency market volatility to cause broader financial instability.