(Reuters) — Major cryptocurrency volatility has hit stablecoins, generally seen as the market’s safe havens, with investors pulling money out of the sector and many losing peg to their underlying assets.
The market capitalization of stablecoins had fallen to $156.8 billion on Thursday, from around $181 billion in early May, according to data from CoinGecko.
Tether, the world’s largest stablecoin, briefly fell to $0.993 on Wednesday, although it quickly regained parity with the dollar.
“Stablecoin’s market capitalization goes hand-in-hand with sentiment and liquidity in crypto markets, and it is mildly concerning that USDT appears to be seeing another round of selloffs,” wrote crypto digital asset manager IDEG. in a note.
Digital asset markets are facing a perfect storm, reeling after crypto lender Celsius froze withdrawals and transfers between accounts following last month’s demise of stablecoin terraUSD, as well as the global crunch in monetary conditions making riskier assets such as cryptocurrencies less attractive.
Stablecoins are crypto tokens pegged to the value of traditional assets such as the dollar, and are the primary means of transferring funds between digital tokens or cash due to their low volatility.
They are also the target of funds that arbitrate between exchanges and geographies, and attempt to bet on stablecoins listed slightly below par returning to parity.
Worries over the exposure of reserve-backed Tether to Celsius, along with ongoing worries about its reserve assets, has caused it to lose more than $5 billion in market capitalization in the past 30 days.
“There is some recognition that they (Tether) are going to have bad debts because of Celsius,” said Joseph Edwards, chief financial strategist at crypto firm Solrise Group.
However, “Tether’s market cap is still over $70 billion and these things are like a drop in an ocean,” he added.
For its part, Tether said all loans to Celsius were over-collateralized and concerns about the composition of its commercial paper reserves were fueled by “false rumours”.
Algorithmic stablecoins also hit
A number of algorithmic stablecoins – which, like terraUSD, use complex mechanisms to control the supply of tokens and maintain their peg to the underlying asset – have also taken a hit.
USDD, the algorithmic stablecoin from smart contract platform Tron and the ninth-largest stablecoin by market capitalization, lost its peg to the dollar on Monday, falling to as low as $0.96 as short sellers piled up extreme positions against the cryptocurrency, according to researcher CryptoCompare.
Tron founder Justin Sun has pledged to deploy over $2 billion to defend the stablecoin’s peg.
“I don’t think they can last even 24 hours. Short squeeze happens,” he tweeted on Monday. Sun did not immediately respond to a request for comment.
The Tron DAO, which manages reserves for the stablecoin, said on Wednesday it would remove 2.5 billion of its tron tokens from crypto exchange Binance to help bolster the USDD. However, the USDD has yet to regain its peg and is trading at $0.976.
Other algorithmic stablecoins have also faced unpecking in recent weeks, including the Frax stablecoin, which has since recovered, and Neutrino USD, which fell to $0.93 on Wednesday and is trading still under the dollar at $0.966.
Yet these stablecoins are much smaller than Tether, or even terraUSD at its peak.
“There are still depegs in algorithmic stablecoins, but these keep happening over and over again…if something bad were to happen to them, it wouldn’t represent any fracture to the ecosystem like Tether would have,” Edwards said.
One of the potential winners of the current turmoil is the USD Coin, backed by cash reserves and US Treasuries, which has seen its market capitalization steadily climb to over $54 billion from $52 billion. last month, even as other stablecoins struggled.