Crypto world stabilizes after turbulent week rocking stablecoins

Cryptocurrencies steadied on Friday, with bitcoin recovering from 16-month lows after a volatile week led by a slump in the value of the so-called stablecoin TerraUSD.

Crypto assets, swept up in a broad sell-off in venture capital amid concerns about high inflation and rising interest rates, have begun to show signs of stabilization.

While the near-term trajectory of the crypto market is difficult to predict, the worst may be over, said Juan Perez, head of trading at Monex USA in Washington.

“Maybe now that all the hurdles to global growth and monetary tightening are clear, maybe we’ll start to see upward volatility,” he said.

Bitcoin, the largest cryptocurrency by market cap, was last up 4.85% at $29,925, recovering from a December 2020 low of $25,400 hit on Thursday.

Although Bitcoin hit a high of just under $31,000 on Friday, it is still well below the levels of around $40,000 a week ago, and barring a sharp rebound over the weekend, it is on track for its seventh straight week of record losses.

Barry Bannister, chief equity strategist at Stifel, said Bitcoin still has room to fall further, around $15,000.

“Bitcoin is also sensitive to GDP because as we expect (by Q3 2022), Bitcoin falls when the PMI manufacturing index falls, suggesting that a last capitulation fall may be ahead for Bitcoin ,” he added.

Ether, the second-largest cryptocurrency by market capitalization, also rose 6.48 percent to $2,051.

Tether, the largest stablecoin that developers say is backed by dollar assets, was back at $1 after falling to 95 cents on Thursday.

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However, TerraUSD, also considered a stablecoin pegged to the U.S. dollar, continued to drop at 14 cents, according to data tracker CoinGecko. It has been de-pegged from the dollar since May 9.

The total market capitalization of the crypto industry rose 6.6% on Friday to $1.35 trillion, according to CoinGecko data.

The broader financial markets have seen little of the knock-on effects of the cryptocurrency collapse so far. Weaknesses with regulated financial markets will limit the potential for crypto market volatility to lead to broader financial instability, ratings agency Fitch said in a report on Thursday.

“Cryptocurrencies are still small, and cryptocurrency consolidation in the broader financial markets is still very small,” said James Malcolm, head of foreign exchange strategy at UBS.

Beyond Bitcoin

Crypto-related stocks were hit hard as the market collapsed, but brokerage Coinbase rose 16% to $67.87 on Friday, although it was still down 28% for the week.

The cryptocurrency’s global market value has roughly halved since November, but the decline has turned to panic in recent sessions as stablecoins have been squeezed.

Stablecoins are tokens pegged to the value of traditional assets (usually U.S. dollars) and are the primary medium for transferring funds between cryptocurrencies or converting balances into fiat cash.

This week, the cryptocurrency market was rocked by the collapse of TerraUSD (UST), which broke its 1:1 peg to the U.S. dollar.

The coin’s complex mechanism, including balancing with a free-floating cryptocurrency called Luna, stops working when Luna falls to near zero.

“For these types of stablecoins, the market needs to trust that issuers have enough liquid assets that they can sell under market pressure,” analysts at Morgan Stanley said in a research note.

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The company that operates the other stablecoin, called Tether, said it has the necessary assets in U.S. Treasuries, cash, corporate bonds and other money market products.

But the stablecoin could face further tests if traders continue to sell off, with analysts worried that pressure could spill over into currency markets if liquidations mount.

Fitch said that if lose confidence in stablecoins, cryptocurrencies and digital finance could face “significant negative repercussions” as many regulated financial entities have increased their exposure to the industry in recent months.

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