Stablecoins still have work to do

The decline of the whole market is different this time, and analysts point out that its trigger and primary catalyst is stablecoin.

The crypto market has been experiencing a pretty busy period in recent days. We are already counting the fall in the prices of the largest cryptocurrencies by tens of percent. Experienced traders and investors know that this is nothing special in the market. A similar situation is regularly repeated in so-called cycles, which are common in other markets as well. However, the decline is different this time, and analysts point out that its trigger and primary catalyst is stablecoin.

Stablecoins are still the safest cryptocurrencies, aren’t they?

In principle, we could say yes. As their name implies, these cryptocurrencies should just copy the underlying asset’s price, which is mostly the US dollar. Many traders use stablecoins during turbulent periods when high volatility could seriously affect their funds. Simply put, traders in these times move their funds from common cryptocurrencies and keep them in those that give them guarantees of fiat currencies without having to leave the crypto.

Top five cryptocurrency stablecoin tokens, Source: shutterstock.com

The popularity of stablecoins has been growing in recent years because their purchase is one of the easiest ways to enter the world of cryptocurrencies. In addition, after such a purchase, you have time to decide which specific cryptocurrency you want to buy, and you can also wait for the ideal opportunity to make this purchase. At the same time, however, you do not waste the time that is often required for various bank transfers typical for fiat currencies.

So, where can the problem arise in this simple principle of operation?

Thanks to the advantages mentioned above, stablecoins are moving to the top positions in the ranking in terms of total market capitalization and currently occupy up to 3 places in the TOP10. The largest of these is Tether (USDT), which currently ranks 3rd with a market capitalization of more than $ 80 billion. You can easily imagine that these are not companies with small capital, and the goal of each of them is, of course, to make a profit.

The simplest model of such a company looks like this. For example, you send them $ 100, and they will send you 100 coins of this value to your e-wallet. The company then holds your fiat funds as an underlying asset, and they are ready to repurchase coins from you at any time and send you a fiat currency. Of course, they charge some small fees for these services, which make up their profit. However, this describes the ideal scenario, and we can safely call it utopian.

Read also: Goldman Sachs is launching a bitcoin-backed loan

In reality, the actions of these companies are more similar to the banking sector, which tries to evaluate the underlying assets for their own profit, which always takes a certain degree of risk. By default, this includes the purchase of other cryptocurrencies, stocks, commodities, securities and bonds. However, as their client, you take the risk with them, which is the main problem.

USDT, currently the largest stablecoin, has also been blamed for various similar suspicious practices in the past when the company was unable and unwilling to prove where they held funds. However, the reason for investors’ current panic is another stablecoin – TerraUSD (UST), which belongs to the group of algorithmic stablecoins. They use more complex mechanisms to maintain their fixed value, which can be relatively easily used to manipulate the market. The price of UST has fallen to almost $ 0.30 through a similar attack, and it has not been able to get back to $ 1 so far (currently $ 0.16). This is, of course, a massive problem with the “stablecoin”, which belonged to the TOP10 cryptocurrencies, and from the point of view of investors/traders, the only price guarantees of this market fell. This situation started a spiral of panic in the entire crypto market, and we can currently only wait for it to stop.

The official state institutions are already commenting on the situation and are preparing to act

The US Fed warns of the possible financial risks of stablecoins and adds that they may also be a threat to the country’s financial stability. Moreover, this warning comes at a time when US lawmakers are loudly pushing for strict regulations on stablecoins. Although the issue of regulation is a highly controversial topic in the cryptocurrency industry, we must probably agree with them on this. Stablecoins are by no means classic cryptocurrencies, where we can talk about some freedom. They are private companies that are more similar to banks in their business models. The promises of their price stability which we clients trust, should be controlled and regulated.

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According to the Fed, the current legal framework does not oblige these companies to take on any risks and consequences resulting from the apparently possible price drop of their stablecoins. All financial consequences are simply on the clients who trusted the company.

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