Test of Stablecoin’s Cryptocurrency Price
The most notable winners and losers of the most recent cryptocurrency meltdown have been stablecoins. The third- and fourth-largest cryptocurrencies by market size, Tether and USD Coin, have maintained almost all of their value.
A same quantity of very secure assets, like cash and U.S. government debt, support the value of the coins. Additionally, Tether has short-term, A+ rated commercial debt. They have always had accessible liquid cash to pay for withdrawals during times of crises.
The $18 billion in coins that made up the TerraUSD stablecoin’s collateral were made up of other currencies when it faced a traditional bank run in May. That includes Luna coins produced by the same firm in excess of $20 billion. However, when it mattered most, Luna proved to be worthless. On May 7, TerraUSD lost its dollar peg, fell to 15 cents in a week, and is currently only worth a tiny fraction of a penny.
Regulation of Cryptocurrencies
Stablecoins may be thought of as the cryptocurrency equivalent of money market funds, a secure place to store money in exchange for a little return. However, in the instance of TerraUSD, the profits weren’t modest and the investors’ money wasn’t secure.
Holders of TerraUSD profited from a 20 percent interest rate when everything were going well. That ought to have raised a warning sign.
Nevertheless, even money market funds had trouble in 2008, with the Primary Reserve Fund infamously “breaking the buck.” Changes mandated by the Securities and Exchange Commission required funds to keep more liquid assets and stress-test for emergency scenarios.
Something similar could be in the horizon for stablecoins. That would put an end to algorithmic funds with unstable cryptocurrency backing, like TerraUSD. Regulators may also set restrictions on the amount of interest that stablecoins may pay.
Congress may or may not enact legislation to regulate cryptocurrencies, but SEC Chair Gary Gensler has argued that the majority of coins are securities and are already subject to the agency’s oversight.
Bitcoin Crash and the Cryptocurrency Market’s Wild West
In a speech in August, Gensler likened cryptocurrency to the Wild West and described it as “rife with fraud, frauds, and abuse.” Long before the most recent explosions, he started making efforts to curtail such behaviors.
In September of last year, Coinbase said that the SEC had threatened to sue the business, causing it to postpone the debut of its Lend program. Customers that deposited stablecoins for lending to others would earn 4 percent interest from Coinbase. The SEC claimed that since Coinbase is not a bank subject to leverage limitations and deposit insurance, the stablecoin deposits amounted to an investment in a security.
After the SEC claimed that BlockFi’s interest accounts for customers who deposited cryptocurrency constituted as unregistered securities, BlockFi agreed to pay $100 million in penalties. Furthermore, the SEC claimed that BlockFi was doing business as an unregistered investment firm since more than 40% of its assets were made up of investment instruments, including loans made to institutional borrowers for cryptocurrencies.
Similar inquiries reportedly targeted cryptocurrency lender Celsius and its 18 percent interest rate. However, they didn’t arrive quickly enough to stop the train crash this month. Last November, Celsius collected $750 million from investors, but it was nonetheless forced to suspend withdrawals as the cryptocurrency sell-off became more severe after the meltdown of the TerraUSD stablecoin.
Hangover in Cryptocurrency Prices
When deciding whether to invest in cryptocurrencies at the current price, bear in mind that the hysteria is only just starting to fade. The Luna cryptocurrency, which was meant to keep TerraUSD linked to the dollar, only reached its top in April before plunging to zero the following month. This contrasts with the November peak of Bitcoin.
A protracted crypto winter is predicted by the unwinding of excessive leverage, increased regulatory scrutiny, and a Federal Reserve tightening cycle intended to cool speculative ardour. Numerous business plans and financial decisions that seemed sensible and realistic when bitcoin had never seen a protracted losing run are now being subjected to their first significant reality check.
Some proponents of Bitcoin think that the shakeout is long overdue, like CEO of MicroStrategy (MSTR) Michael Saylor, who staked $4 billion of corporate capital on the cryptocurrency.
In an interview with the market analyst website Northman Trader, Saylor said, “What you have is a $400 billion cloud of opaque, unregistered securities trading without full and fair transparency, and they are all cross-collateralized with Bitcoin.”
The inference is that the most recent Bitcoin fall is the result of unscrupulous activities throughout the crypto industry and the cascade margin calls they’ve sparked. Saylor’s claim that Bitcoin is a limited resource is also challenged by all of those other cryptocurrencies. From 90 percent at the beginning of 2016, the market capitalization of Bitcoin today represents around 45 percent of the value of all cryptocurrencies.
What Will Come After The Cryptocurrency Ice Age?
Saylor’s viewpoint could minimize the importance of Fed tightening and the degree to which the need for collateral to support cryptocurrency speculation increased Bitcoin’s price.
However, inflation will ultimately decline, and the Federal Reserve’s cycle of tightening will come to an end. However, it is doubtful that the central bank would resume a consistent super-easy monetary policy any time soon.
Eventually, a new crypto spring will appear. Just be aware that it won’t resemble the previous ones in the least.
