The fall in the price of a previously little-known digital currency has excited the entire crypto industry. The TerraUSD currency, whose rate should actually be tied one-to-one to the US dollar, has fallen by around 70 percent at times in the past few days and, according to the industry service CoinMarketCap.com, was $0.63 on Thursday. According to Bloomberg calculations, the market as a whole has been wiped out at $200 billion since the crypto boom peaked in November.
“TerraUSD’s peg collapse had some ugly and predictable side effects,” said Richard Usher, manager at digital currency financial services firm BCB. One of them is the sell-off in other cryptocurrencies such as Bitcoin or Ethereum. Their course has fallen by 18 and 25 percent since the beginning of the week. TerraUSD is one of the so-called stablecoins. Their courses are tied to other values such as the US dollar or gold. This is intended to avoid price capers, which are the order of the day with Bitcoin. Because with the latter, only supply and demand determine the price. While most providers of stablecoins guarantee the course binding with deposits in dollars or gold, for example, TerraUSD is a “decentralized” stablecoin. Here, a complex mechanism of trading transactions with other cryptocurrencies should automatically keep the course at one US dollar per TerraUSD. With a total market cap of $7.6 billion, TerraUSD is the #14 cryptocurrency according to CoinMarketCap.com.
With markets plummeting in tandem, traders pointed to the cryptocurrency chaos as a focal point. Strategists are increasingly concerned that retail investors, already suffering losses on meme stocks, will be wiped out with their crypto holdings and sell everything else. “The contagion here is not through the connections between the crypto scene and the traditional financial system, but through retail investor sentiment,” said Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co. “When the $1 trillion capital loss in crypto markets causing a broad-based pullback from retail investors into other risky assets like stocks, that’s where the contagion happens.”
In the wake of TerraUSD, the price of the best-known stablecoin, Tether, also slipped and fell to as much as $0.95 on Thursday. Since Tether is not sufficiently transparent about which securities holdings it uses to maintain its peg to the dollar, it is a natural target for speculators, said BCB expert Usher. However, Tether is more established than TerraUSD. Therefore, the course will certainly level off at one dollar soon. With a market value of around $82 billion, Tether is the number three cryptocurrency behind Bitcoin and Ethereum. This cyber motto accounts for around half of the added market capitalization of all stablecoins.
Against this background, governments want to push regulation of the sector. Ashley Alder, head of the World Organization for Securities and Exchange Commissions (IOSCO), signaled the creation of an international cryptocurrency authority for next year. In addition to climate change and the pandemic, this is the third important issue for governments. The US Federal Reserve had recently warned of falling prices for stablecoins because the value of deposits, which are supposed to guarantee price fixing, could fall in turbulent times on the stock exchange.