The cryptocurrency market received yet another blow as there are rumors that the Tether stablecoin crash might happen
The cryptocurrency market has taken another hit, with reports that the Tether stablecoin may implode. Following the collapse of TerraUSD UST, many investors began to distrust cryptocurrencies in general, and stabelcoins in particular.
Tether had previously received some unfavorable press after it was revealed that it did not have a 1:1 USD to USDT backing.
What Are Stablecoins?
Stablecoins are digital currencies that have a 1:1 relationship with another financial asset. The dollar-denominated coins are the most popular.
In a very unpredictable market, this allows crypto-asset owners to convert their money into a more useable form. Before stablecoins, converting FIAT money to cryptocurrency was significantly more difficult.
How do Stablecoins work?
There are three varieties of stablecoins that are pegged to the US dollar:
Stablecoins With Collateral:
Each coin in this sort of stablecoin is backed by an asset. A banking institution, for example, can keep a US dollar equivalent for each coin (Example: Tether, USD Coin, Binance USD).
These coins use blockchain-based mechanisms to maintain a consistent price (example: TerraUSD).
Smart contracts are used to bind other crypto assets as collateral for loans in collateralized stablecoins.
What Is Tether?
Tether was first released as a physical coin in 2014. It is the market’s largest and most well-known stablecoin.
Tether has a market capitalization of $75.6 billion, making it the third most valuable cryptocurrency on the 400+ crypto exchanges.
Despite its superior functionality and market dominance, Tether has recently been chastised for repeatedly denying that it has a 1:1 US dollar backing.
It had already paid hefty fines in the United States for illegal behavior. Despite these difficulties, Tether remains the most popular stablecoin on the market.
Will Tether Stablecoin Crash?
Tether stablecoin lost its peg for several hours when UST stablecoin first crashed, but arbitrageurs were able to jump into the buying side and bring prices back to $1. It is not uncommon for USDT to fall or rise by a fraction of a percent.
However, prices dropped by more than 5%, bringing them to $0.95. This is definitely not the best news for cryptocurrency investors. In fact, investors use USDT to protect themselves against price fluctuations.
If USDT is no longer safe and becomes another UST incident, there will almost certainly be a large dump in USDT, signalling another collapse.
Previous rumors suggested that Tether was not as fully backed as it claimed. In February 2021, the company settled a lawsuit by revealing that it used commercial paper to back its USDT rather than US dollars.
USDT Is Not Yet Fully Backed 1:1 To USD
Tether has yet to completely provide an audited report demonstrating the entire 1:1 conversion to USD.
The corporation said in July 2021 that a thorough audit will be released within months, but nothing has happened since then. With the threat of another UST collapse looming, a Twitter user contacted Paolo Ardoino, Tether’s CTO, about the peg.
The latter stated that USDT was fully pegged, notwithstanding a +$7 billion withdrawal from investors in the previous week.