• May 27, 2022

Crisis in cryptocurrency exchanges: How else can you invest in this market?

Crisis in cryptocurrency exchanges: How else can you invest in this market?

The spectacular collapse of the Terra (Luna) project and the associated stablecoin UST caused strong disturbances throughout the crypto market. It is not for nothing that Terra at its peak took the place of one of the leaders of the crypto revolution. Now the panic has moved to the largest stablecoin on the network, Tether.

  • Since the fall of the Luna cryptocurrency and the TerraUSD stablecoin, Tether has recorded an outflow of more than $9 billion. The reduction in the capitalization of Tether could pose a threat to the entire cryptocurrency market.
  • Stablecoins seemed to be treated as a relatively “safe haven” in the crypto market, however, after recent events, it has become clear that they cannot act as a safe deposit of value.
  • Tether’s reserves and guarantees have been the subject of many controversies in the past, and now they will almost certainly be under the regulatory radar.
  • Tether has repeatedly refused to fully audit its reserves and even after it lost its parity with the dollar, no clear information was provided.

Stablecoin: an oasis of calm?

Stablecoins have acted calmly through limited volatility. Because of this, when Bitcoin and other cryptocurrencies were falling, the capitalization of stablecoins was gaining mightily. Stablecoins allows investors to react quickly to price changes and allows for quick purchases of cryptocurrencies. Recently, the function of stablecoins has been expanded, and for some of them, holders can get additional “passive income”.

Most of the stablecoins on the market are backed by reserves of fiat currencies such as the US dollar or the Swiss franc. However, this is not only cash, but also a variety of other assets, including short-term debt securities issued by enterprises (which raises concerns about the security of such reserve deposits).

Controversy over projects

Alternatives to the traditional stablecoin include algorithmic projects such as TerraUSD (UST), which are based on a trading code that creates demand and supply around it in order to maintain the value of the coin. The convergence of the Terra collapse and the growing uncertainty surrounding Tether is putting pressure on the USDT, which has lost its 1-to-1 correlation with the US dollar several times in the last two weeks.

The recent falls brought the issue of Tether reserves back into the spotlight. When Tether last revealed its reserves, cash accounted for about $4.2 billion of its assets. The vast majority ($34.5 billion) consisted of unidentified Treasury bills with maturities of less than three months, while $24.2 billion were debt securities.

The decrease in the liquidity of Tether, the reduction in capitalization and the widespread loss of confidence in this stablecoin could lead to its collapse. Tether remains the leading stablecoin with the largest number of cryptocurrencies listed.

Paolo Ardoino, Tether’s chief technology officer, declined to reveal the security features, citing privacy concerns after Tether’s price collapsed and dropped to $0.95. At the same time, Ardoino threatened to sell reserves in US government bonds. UU. to defend the token. In the past, the cryptocurrency came out of every depression unscathed, and problems with the correlation with the dollar were extremely rare and were quickly fixed. Tether survived recent falls and is positively correlated with the US dollar.

Extract from an audit report of Tether reserves conducted by mhaCayman Agency. Date of elaboration: December 31, 2021 Source: Tether
The market capitalization of Tether has fallen by more than 9,000 million dollars since the fall of Luna. Source: CoinMarketCap

How to hedge a cryptocurrency portfolio?

Hedging a cryptocurrency portfolio is made possible by investing in CFDs. This investment allows us to enter sold in a cryptocurrency (to enter sold is to speculate that the price of an asset is going to go down), and thus be able to obtain capital with the opposite operation to the one we have in our portfolio. With XTB you can trade more than 20 CFDs on cryptocurrencies.

Investments in cryptocurrencies through CFDs carry risk involved. You need to understand these assets well before investing in them.