Bitcoin price drops below $26,000


Bitcoin slumped and the world’s largest stablecoin, Tether, briefly dropped its peg to the dollar, raising fears of further turmoil in the cryptocurrency market.

Cryptocurrencies have been hit by two forces this week. On the one hand, fears that inflation will require severe tightening by the central bank has exhausted the appetite for holding assets that are seen as risky. On the other hand, the TerraUSD chapterA stablecoin whose value has been pegged to one dollar, has caused ripples with digital assets.

Bitcoin fell to $2,5402.04 on Thursday, down 10% from ET 5 p.m. Wednesday, its lowest since December 2020, before rebounding to around $28,600, According to CoinDesk. Bitcoin has fallen for the last seven days in a row through Wednesday — its longest losing streak since March 2020, according to Dow Jones market data. Ether is down 4.8% from Wednesday evening to trade at $1,933.85 on Thursday – its lowest level since July 2021.

Cryptocurrencies have come under pressure in recent days Next to the stock market. Digital assets are growing Moving at a steady pace with the arrows Analysts say traditional money managers such as hedge funds and family offices have entered the space over the past two years. These funds may be more likely to sell crypto holdings during periods of volatility than to hold them.

Stores astounded wednesday Like Inflation has proven to be more stable than economists expected, adding to concerns about the size of the Federal Reserve To further tighten financial conditions To reduce inflation. Investors are concerned that sharp interest rate increases could affect growth, already a concern over the Covid-19 shutdowns in some Chinese cities and the war in Ukraine.

Cryptocurrencies were also hit by the depegging of what was previously the third largest stablecoin by market capitalization. Described as the least volatile part of the crypto world, these assets are linked to the value of government-issued currencies. TerraUSD stablecoin has I broke off the peg 1 dollar In recent days, it’s 61 cents at 8:20 a.m. ET Thursday.

Its sister token, Luna, was trading at 3 cents, down 99% from the previous 24 hours. Autumn puts its value lower than that of the prank cryptocurrency Dogecoin, which was trading about 8 cents at the same time.

Bitcoin fell to $2,5402.04 on Thursday.


picture:

Umit Turhan Coskun / Zuma Press

While the most popular stablecoins maintain their levels through assets that include debt and cash denominated in dollars, TerraUSD is what is known as an algorithmic stablecoin, which relies on financial engineering to maintain its peg to the dollar.

In the past, TerraUSD maintained its $1 price tag by relying on traders who acted as its backers. When it drops below the peg, traders burn the stablecoin – and take it out of circulation – by exchanging TerraUSD for $1 of new Luna units. This action reduced the supply of TerraUSD and raised its price.

Conversely, when the value of TerraUSD rises above $1, traders can burn Luna and create a new TerraUSD, thereby increasing the supply of the stablecoin and lowering its price back towards $1.

This system stopped cryptocurrency stability after a series of large withdrawals to TerraUSD from the Anchor Protocol, a kind of decentralized bank for crypto investors. At the same time, TerraUSD was also sold to other stablecoins through various liquidity pools that contribute to the stabilization of the peg. The sudden rush of selling frightened some dealers, intensifying the defeat.

Markets have been looking increasingly shaky lately: stocks, bonds and cryptocurrencies are all plummeting as investors struggle to manage the huge volatility in distressed financial markets around the world. Caitlin McCabe of the Wall Street Journal looks at some of the reasons behind the recent market frenzy. Photo: Spencer Platt/Getty Images

The break in TerraUSD also caused fears that other stablecoins could break from their typical levels. Tether, the largest stablecoin by market capitalization, fell to 96 cents at around 3:15 AM ET before rebounding to 99.3 cents at 8:20 AM, according to CoinDesk data. Investors say some hedge funds have ramped up bets that the rope might break out of the $1 level in recent days.

Regulators have examined the stablecoin in the past, which parent company Tether Holdings Ltd says. It is backed by cash reserves or other financial instruments, Because it is so vague.

It took a year-long investigation by the New York attorney general, and eventually $18.5 million settlement From accusations that Tether misled clients, to having Tether disclose what it holds in general terms only every quarter through its accounting firm. These holdings consist of investments such as cash and short-term US government securities but also short-term debt securities known as commercial paper.

Tether has not disclosed which companies the commercial paper has been sourced from, which has led investors to worry about the quality and stability of these companies. Tether previously said she had consciously reduced her holdings of commercial papers since settling the matter with the New York attorney general.

“Tether is the most liquid stablecoin on the market and is 100% backed by a strong, conservative and liquid reserve portfolio. Tether has withstood several “black swan” events in the cryptocurrency,” a Tether spokesperson said, adding that the company continued to process redemptions as normal amidst Current sales of cryptocurrency.

Treasury Secretary Janet Yellen on Tuesday renewed her calls for Congress Authorize regulation From the so-called sedentary.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

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