Why the cryptosphere follows the evolution of stablecoin tether very closely

If the stable coin tether (USDT) were to fall sharply, the cryptocurrency ecosystem would be shaken.

In the midst of the collapse of the Terra blockchain stablecoin terra usd (UST), investors’ eyes are now on the largest stablecoin in history: tether (or USDT), which is currently worth $ 79 billion. capitalization according to the Coinmarketcap page.

On Thursday, the tether fell below its 1: 1 tie to the dollar to trade at $ 0.97, sending holders cold sweats. It has since returned to a value of $ 0.99 at the time of writing.

As a reminder, a stablecoin (or stable cryptocurrency) is a cryptocurrency (or digital asset) linked to a financial currency such as the euro or the dollar. A stack coin can also be backed up by other assets (such as gold). This is called the underlying stablecoin.

When the price of the underlying goes up or down, the value of the stablecoin must match it. The promise is to keep the parity permanent, for example 1 USDT = 1 dollar. This binding to a currency is also called a “point”. When there is a gap between the value of the underlying and the value of the stack coin, it is called a “de-point” or “loss of parity”.

Like any so-called “classic” stablecoin (not to be confused with those called “algorithmic”), tether must guarantee to have as many dollars in reserve as there are stablecoins in circulation. So if a customer wants to sell his stack coins for dollars, there is definitely enough money in the coffers of this company to make this conversion. It is therefore a parity based on the stock of “real” money available to the stablecoin issuer.

Lack of transparency about funds in the reserve

The fall of the USDT is part of, but not limited to, a general context of mistrust in the stablecoin market. Tether is particularly criticized for its lack of transparency regarding the reserve funds it has, while stablecoin has a capitalization of $ 79 billion.

According to information communicated by tether at the end of December, the company holds in particular around 35 billion in government bonds, 25 billion in “commercial paper” (generally short-term commercial debt in companies, editor’s note) and 4.16 billion in cash. The remaining $ 16 billion is invested in other financial products, such as cryptocurrencies or corporate bonds. The company ultimately provides very few details.

For example, in terms of “commercial paper”, “we do not know what companies they are and whether these companies could repay their debts or not in the event of the collapse of Tether”, explains BFM Crypto Vincent Boy, analyst at IG France.

A sharper decline in cryptocurrencies

But there’s another big problem: If everyone would raise their US dollars to this stablecoin, would tether have enough money to repay those $ 79 billion in capitalization? Hard to know.

“We could be in a scenario like in the 1929 crisis, it would weaken confidence in tether, but also in cryptocurrencies, because tether in particular is used a lot for trade,” the expert emphasizes.

In fact, as a stablecoin, where one of the most important features is to combat the volatility of cryptocurrencies, tether is mainly used for trading cryptocurrencies. “If falling individuals and investors no longer have a way to protect themselves against volatility, then this could lead to a sharp fall in cryptocurrencies. This is a matter of general confidence in the cryptocurrency market,” says Vincent Boy.

“We must not go back years”

“Since the market is emerging, there are a lot of risks, we must not undermine confidence, and we must not go back to years. Even if cryptocurrencies fall completely, there will always be a market because it is an online technology, the blockchain. even though bitcoin drops to $ 1, ”the latter believes.

In addition to making individuals lose a lot of money, a sharp fall in cryptocurrencies would also jeopardize the balances of many companies that have relied on bitcoin, such as Tesla or Microstrategy. “Companies with bitcoin in their treasury may find themselves heavily indebted and no longer able to repay their debts,” warns Vincent Boy.

In a gloomy environment of the stablecoin market, it seems that users are turning to other stablecoins, such as Binance’s stablecoin, Binance USD, which has a market value of $ 17 billion.

“To date, users have more confidence in Binance’s stablecoin, which is the largest trading platform in the world, which explains why Binance certainly has more capital to carry out attacks on its stablecoin and therefore bring some confidence in his stablecoin,” indicates Vincent Boy.

As of today, the USDT is not in danger of falling as long as individuals and investors do not decide to withdraw their funds massively. But its slight decline following the collapse of terra usd calls into question the apparent stability of these assets, which showed failure over the course of a few days. In this context, the US regulator, through the voice of the current US Treasury Secretary Janet Yellen, wants to move forward with its plan to regulate stack coins and cryptocurrencies.

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