Tether Crash: Will It Follow Terra’s Footsteps?

Tether, the world’s largest stablecoin, has been slowly declining since its value fell below the $1 peg on May 12th, smack dab in the thick of the crypto market meltdown.

Investors have quickly withdrawn funds totaling more than $10 billion since TerraUSD’s depreciation, implying that Tether has paid spooked parties twice its total cash holdings.

What caused the Tether Crash in the first place?

Tether’s bearish market and value decrease to a low of 94% in the second week of May has sparked discussion over whether it will crash as irreversibly as Terra. This started when liquidity pools allowing users to swap Terra for other assets were practically empty for a short period of time. People panicked, believing that the stablecoin was trading below the peg. Because the US dollar was sinking rapidly at the moment, a Tether crash seemed probable.

The former company, on the other hand, has promised savers $1 for every coin they return to the company, regardless of market value. Tether levies a 0.1 percent fee on each redemption and only allows direct withdrawals of a minimum of $100,000 per request. Any coin owner with fewer than the required number of coins can only convert their assets to dollars by selling them to other investors.

Despite doubts about the company’s plan and concerns about their ability to honor all inbound redemptions, more than $10 billion has been transferred in this manner since Thursday’s brief crisis. Since then, about 300 million tether tokens have been redeemed for $1, making Terra users happy all across the world. Tether has increased its treasury holdings, which now account for more than half of the company’s total assets, and is reducing its commercial debt in order to protect its users’ investments in the volatile cryptocurrency market.

The road ahead

Investors and analysts are still unsure whether Tether will follow TerraUSD down the rabbit hole, but for the time being, the stablecoin’s status in the market is less volatile than Terra, Bitcoin, and other cryptocurrencies.

Stablecoins are widely recognized as an important component of many DeFi applications and blockchain technology in general. Stocks have plummeted as a result of the worries around stablecoins, and several crises have erupted across the crypto sector. When there is a breakdown or disaster in one area of crypto, it nearly invariably leads to various users misunderstanding things and overcorrecting in ways that are harmful to the community.

People have concluded that anything related to one stablecoin is fragile and tenuous as a result of its demise. However, because each stablecoin has its own architecture, different causes will not necessarily have the same impact on all of them. Unlike Terra, Tether was not backed by a fiat currency kept in reserves. Instead, it depended on complicated algorithms to keep its price stable in the face of a volatile market.

Because of Tether’s significant position in the financial engineering of the crypto sector, there is a risk of contagion if it falls apart. However, the company’s commitment and subsequent reduction in commercial paper investments have aided the stablecoin’s stability through many black swan incidents. As it continues to trade, users have been reassured by guarantees and proof of its creditworthiness.

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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