Crypto market capitalization weekly chart. Source: TradingView

Stablecoins Not Very Stable

A massive move lower from $69,000 in November 2021 to around $24,300 in May 2022 in Bitcoin’s (BTC) price has caused a selloff frenzy across the crypto market.

Unfortunately, the bearish sentiment has not even spared stablecoins, so-called crypto equivalents of the United States dollar, which have been unable to stay as “stable” as they claim.

For instance, TerraUSD (UST), once the third-largest stablecoin in the industry, lost its dollar peg earlier this week, falling to as low as $0.05 on May 13.


UST/USD daily price chart. Source: TradingView

Meanwhile, Tether (USDT), the largest stablecoin by market cap, briefly fell to $0.95 on May 12. But, unlike TerraUSD, Tether managed to recover back to near $1, primarily because it claims to back its dollar peg using good old-fashioned reserves, including the real dollars and government bonds.

Crypto Spillover Risks Threaten Investors

But, that is where the trouble began, according to a warning issued by rating agency Fitch last year. The agency feared that Tether’s rapid growth could have implications for the short-term credit market, where it holds a lot of funds, according to the company’s reserves breakdown disclosure.

“If traders decide to dump their Tether, the most-popular dollar-pegged stablecoin in the crypto sector, for cash, it would risk destabilizing the short-term credit market,”Fitch noted.

The credit market is already struggling under the weight of higher interest rates. Tether could further pressure it lower as it holds $24 billion worth of commercial paper, $35 billion worth of Treasury notes and $4 billion worth of corporate bonds.

The signs are already visible. For example, “Tether has been reducing its commercial paper reserves during the crypto correction in the last six months, its chief technology officer,”Paolo Ardoino, confirmed on May 12.

Fear Grips the Entire Financial Market Platforms

So, based on Fitch’s warning last year, many analysts fear that the “financial run” might soon spill over to the traditional market.

That includes Joseph Abate, managing director of fixed income research at Barclays, who believes Tether’s decision to sell its commercial papers and certificate deposit holdings before maturity could mean paying several months of interest in penalty.

As a result, they could be forced to sell their liquid Treasury bills, which make up 44% of their net holdings.

Related: Altcoins taking it on the chin

“We do not know what is going to happen, but the danger cannot be dismissed out of hand,” opines Robert Armstrong, the author of Financial Times’ Unhedged newsletter, adding:

“Stablecoins have a total market capitalization of more than $150 billion. If the pegs all break — and they could — there will be ripples well beyond crypto.”

Fear & Greed Crypto Index Lowest in Over a Year

After a brutal few weeks, the cryptocurrency market remains wobbly, with Bitcoin trading at around $30,000 on Tuesday. (It was $29,746 at time of publication.)

Though things are not as bad as they were last week, investors are still afraid, according to hosting site Alternative. The same day, its Crypto Fear and Greed Index, which analyzes the sentiment of the Bitcoin market, dropped to a level not seen since March 2020.

Representing “extreme fear,” the index is now at an 8, down from 14 just yesterday and 28 last month.