$1.9 trillion wipe out in crypto risks could spill over into stocks and bonds – stablecoin Tether in focus

The cryptocurrency market has lost $1.9 trillion six months after hitting a record high. Interestingly, those losses are larger than those during the 2007 subprime mortgage market crisis — around $1.3 trillion, which has raised fears that creaky crypto market risk will spill over into traditional markets, hurting stocks and bonds alike.

Crypto market cap weekly chart. Source: TradingView

Stablecoins not very stable

A massive move lower in the price of Bitcoin (BTC) from $69,000 in November 2021 to around $24,300 in May 2022 has sparked a sell-off frenzy across the crypto market.

Unfortunately, bearish sentiment hasn’t even spared stablecoins, so-called crypto equivalents of the US dollar, which have not been able to remain as “stable” as they claim.

For example, TerraUSD (UST), once the industry’s third-largest stablecoin, lost its dollar peg earlier this week, falling as low as $0.05 on May 13.

UST/USD daily chart. Source: TradingView

Meanwhile, Tether (USDT), the largest stablecoin by market cap, briefly fell to $0.95 on May 12. But unlike TerraUSD, Tether managed to bounce back to close to $1, largely as it claims to back its dollar peg with good old-fashioned reserves, including real dollars and government bonds.

Crypto Spillover Risks

But that’s where the problems begin, according to a warning from the rating agency Fitch last year. The agency feared that Tether’s rapid growth could impact the short-term lending market, where it holds a lot of funds, according to the company’s reserves breakdown published here.

If traders decide to sell their tether, the crypto sector’s most popular dollar-pegged stablecoin, for cash, they risk destabilizing the short-term lending market, Fitch noted.

The credit market is already suffering from the weight of higher interest rates. Tether could push it lower as it holds $24 billion in commercial paper, $35 billion in Treasury bills, and $4 billion in corporate bonds.

The signs are already visible. For example, Tether has reduced its commercial paper reserves during the crypto correction over the past six months, its chief technology officer Paolo Ardoino confirmed on May 12.

As such, many analysts fear that the financial run could soon spill over into the traditional market, based on Fitch’s warning last year.

These include Joseph Abate, managing director of fixed income research at Barclays, who believes Tether’s decision to sell its commercial paper and certificate deposits ahead of maturity could mean paying several months of interest as a penalty.

As a result, they may be forced to sell their liquid Treasury bills, which make up 44% of their net holdings.

Related: What happened? The Terra debacle exposes vulnerabilities plaguing the crypto industry

“We don’t know what’s going to happen, but the danger is real,” said Robert Armstrong, author of the Financial Times’ Unhedged newsletter, adding:

“Stablecoins have a total market cap of more than $150 billion. If all the pins break – and they might – there will be ripples way beyond crypto.”

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