The turmoil in the crypto market was ironically triggered by volatility in stablecoins.
A stablecoin is a cryptocurrency that is linked to real money such as the euro and the dollar. The best-known example is Tether, a stablecoin that was enormously popular and until recently was always worth the same as the dollar or the euro. This fixed exchange rate is similar to countries that have locked in their currencies to the dollar, for example (Bahrain, Belize, Cuba, Djibouti, Eritrea, Hong Kong, Jordan, Lebanon, Oman, Panama, Qatar, Saudi Arabia, and the United Arab Emirates). To guarantee this, ‘peg,’ dollars or euros must, of course be held, and this is precisely where the problem lies. Dollars in an account give less return than, for instance, Treasuries, and besides, there are more investments (commercial paper) you can think of that give better returns. The problem is that any investment other than a dollar or a euro could jeopardize the fixed exchange rate. When the peg comes under pressure, positions may have to be sold, and then even normal liquid paper may come under pressure. Lehman usually used General Electric bonds as collateral because this gave a higher yield than, for example, US government paper or French government bonds, but when Lehman collapsed, a lot of GE paper suddenly appeared on the market, resulting in considerable price pressure.
Last Thursday, Tether was unable to maintain its peg against the dollar. The token dropped to 95.11 cents against the dollar. Earlier, its smaller rival Terra USD had run into trouble, immediately pushing Bitcoin to its lowest level since 2020. Tether and Terra USD are unregulated, and stablecoins play a central role in the crypto market, a safe place to park cash without having to perform all kinds of costly operations to convert them to real dollars or euros. There are 80 billion Tether tokens in circulation. This means that there must be 80 billion Tether tokens in circulation. However, there are insufficient details about how the 80 billion are managed, and there is no supervision by an accountant. Paolo Ardoino, the CTO of Tether, promised to defend the peg with the dollar but, in an interview with the Financial Times, he did not want to give details about the 40 billion in US government bonds in his portfolio because he did not want to give away the ‘secret recipe.’ That kind of reaction does not help confidence, of course. Last year, Tether was fined 41 million dollars by the US CFTC for misleading statements about its reserves. Large accounting firms do not dare have a relationship with Tether because of reputation risks.
An important difference between cryptocurrencies and gold and other precious metals is that cryptocurrencies need constant maintenance to maintain their properties (read value). The moment there is no more interest in a particular cryptocurrency, it quickly loses its value. When something can go to zero, even when the chance is small, the cash value of such a coin quickly becomes zero, that is simply the consequence of calculating with zero. Furthermore, cryptocurrencies have once again shown, as in the correction in the early 2020s, that they fall more sharply than the Nasdaq when the stock market is under pressure. Bitcoin is down 31 per cent this year at the time of writing. That is not a favourable characteristic for adding crypto to a portfolio. However, the volatility in bitcoin was again unprecedented, which means that the parties who can make use of it can earn a lot in the short term, of course, as long as the crypto market as a whole can maintain sufficient value. The value of the total crypto market was almost $3 trillion at its peak in November last year. Less than half of that now remains.
Meanwhile, Reddit and Twitter are full of stories about young and inexperienced crypto investors who were wiped out in a matter of days. The advantage is that these people can now get back to work. Good news, given the shortages in the labour market. It may also reduce demand in the housing market in certain parts of the world. It may even help to reduce inflation a little. But it may also get in the way of the price recovery in the Nasdaq. This development will undoubtedly lead to increased calls for supervision and government intervention, especially if market participants have used leverage to invest in crypto-currencies. The stability of the traditional financial system will then be at risk.
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