1 EURO = 1USD, What It Means for Crypto?

The euro’s biggest slide in its 20-year history could add downward pressure around bitcoin and euro-pegged stablecoins.

This is the first time in 20 years that the euro has depreciated so sharply. This shows that the European economy has weakened significantly amid dizzyingly high inflation and the impact of the Russia-Ukraine war.

This is also very worrying because once winter comes, Europe has to import large quantities of goods, such as oil and fossil fuels for heating. Meanwhile, the depreciation of this currency will make imports more expensive.

The decline seems to have stemmed from the European Central Bank (ECB) lagging behind the Federal Reserve (Fed) in tightening monetary policy despite rising inflation.

And some observers suggest that the euro’s latest slide could put downward pressure on the bitcoin (BTC) market and affect demand for euro-pegged stablecoins.

Euro-pegged stablecoins could lose their shine

Stablecoins are tokens tracked by a blockchain and intended to consistently match the purchasing power of a fiat currency, like the dollar or the euro. The issuer of the stablecoin promises that users or holders of the stablecoin can redeem the investment anytime at a one-to-one exchange rate.

The structure exposes the user to exchange-rate risk. 

“If it breaks, it will most likely spur some FX volatility in the short run, spilling into other asset classes, including crypto, and trigger selling of euro-backed assets.”

Dessislava Aubert, senior research analyst at Paris-based Kaiko, told CoinDesk

One question is whether potential redemptions and volatility in the euro-pegged stablecoins would have a Terra-like contagion effect on the broader crypto market. The answer is probably no because these stablecoin market is quite small.

These stablecoin market was worth $440 million at press time. That’s just 0.29% of the dollar-pegged stablecoin market value of $151 billion, according to data tracked by CoinGecko. Cryptocurrencies more broadly have a market capitalization of $950 billion.

The ECB will most likely raise interest rates to record highs, similar to what the Fed did.

While the EUR/USD slide may dent the appeal of the EUR-pegged stablecoins, it could spur demand for the dollar-pegged stablecoins. With the Fed raising rates aggressively to tamp inflation, traders already have a solid reason to hold the dollar-pegged stablecoins.

Besides, the ECB is widely expected to exit the negative interest rate policy this year, which may eventually bode well for this currency and assets backed by the common currency.

Interest-rate traders expect the ECB to raise the benchmark borrowing costs by 140 basis points (1.4 percentage point) by the end of the year. The central bank’s benchmark interest rate currently stands at -0.5%.

Is this an opportunity or a challenge for BTC as more and more people consider Bitcoin a safe haven asset?

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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