During a week packed with inflation concerns, stock market pressures, and the breakdown of popular stablecoins, the volatility of cryptocurrency is on full display.
- Concerns around the US Federal Reserve tightening financial conditions to curb inflation has investors reverting back to lower-risk assets, especially among traditional money managers that have only recently entered the crypto space.
What happened: Cryptocurrencies have been hit hard by a sell-off across higher-risk assets (with Bitcoin falling ~22% in May alone), which snowballed after the prominent stablecoin, TerraUSD, broke its peg to the US dollar after a series of large withdrawals last weekend.
- In theory, stablecoins are meant to be the most, well, stable of all cryptocurrencies because their value is pegged to a traditional, legit, asset, like a national currency. For instance, one TerraUSD token is always supposed to be worth US$1.
- How they do this is another story, but many stablecoins are backed by literal money in the bank (although some critics question the funds), but unlike most, TerraUST maintains its peg using a complex mechanism of constant checks and balances.
TerraUSD is now trading at about half its ‘stable’ value, which shook investor faith enough for people to think: “Wait, are there any other sketchy stablecoins I own?” The world’s largest stablecoin Tether fell from its peg soon after and the sector’s worst crash in years persisted
- The declines prompted Treasury Secretary Janet Yellen to call on Congress once again to authorize the regulation of stablecoins, calling them a rapidly growing product that poses financial risks that require a consistent federal framework.
Why it matters: As developers behind these cryptocurrencies scramble to recover their losses, they may never recover the investor trust that boosted the perceived value of their tokens—which would create a perfect scenario for regulators to start getting more involved.