A stablecoin just “unpegged” from the dollar, testing crypto’s ability to weather big downturns

Wednesday, May 11, 2022 by Robinhood Snacks |
A stablecoin breaks the buck (dem10/Getty Images)

A stablecoin breaks the buck (dem10/Getty Images)

Not so stable after all… Stablecoins are causing crypto chaos. Refresher: stablecoins are cryptocurrencies whose value is (theoretically) pegged to another asset, like the USD. But this week TerraUSD (UST), the third-largest stablecoin, was unpegged from its $1 value and fell to $0.62. Investors then sold UST (think: crypto bank run), sending jolts through the market.

  • Broken algorithm: Most stablecoins are backed by cash reserves, but “algorithmic” coins like UST are backed by “sister” coins. When one sister dips below $1, it can be swapped for the other at a small profit, which (theoretically) keeps both stable.
  • Bitcoin bailout: During this week’s bitcoin sell-off, UST and its sister coin slumped together, causing investors to ditch both. To prop ’em up, UST’s creator sold some bitcoin from a $3.5B emergency stash — but UST still isn’t back to $1.

Crypto’s confidence crisis… goes beyond stablecoins. The crypto market has lost nearly $2T in capitalization from its November peak. Even bitcoin is down 50% since then, which has led analysts to question its status as “reserve currency” for other coins like UST.

  • Companies including Tesla, Square, Coinbase, and MicroStrategy have lost billions on crypto in recent months.
  • El Salvador, which accepts bitcoin as legal tender, has lost $$ too (though it bought 500 bitcoin this week).

Most cryptos were minted in calm weather… Now they’re caught in the path of two storms: regulation and recession. UST’s “buck-breaking” moment showed that even so-called stable coins are risky, prompting Treasury Secretary Janet Yellen to call — again — for new crypto rules. Plus, economists predict a recession’s coming, which could cause un-tested coins like UST to lose more value. Investors may get caught in the rain: most short-term crypto investors are already underwater, and more than half of bitcoin holders are in the red.