22nd June 2022 – (Sydney) It’s been a nightmare few months for cryptocurrency investors, with billions being wiped off the market in a matter of weeks, but it’s about to get a whole lot worse.
A US financial expert has pointed to one thing that could bring down the entire cryptocurrency market for good, and it might be about to happen.
“Tether is really the lifeblood of the crypto ecosystem,” Hilary Allen, a finance expert at American University, told The New York Times. “If it imploded, then the entire facade falls down.”
Tether is a so-called stablecoin, a newer type of cryptocurrency that aim to insulate themselves from the extreme volatility of the rest of the crypto market by keeping prices stable, usually by pegging them to the price of a traditional currency. In Tether’s case, its value is tied to the value of the US dollar, though it also issues tokens pegged to the euro, the yuan and gold.
It’s the third-largest cryptocurrency after bitcoin and ethereum, with a market capitalisation of nearly US$83 billion (A$119.4 billion).
It was launched as RealCoin in July 2014, rebranded as Tether that November, and began trading in February of the following year.
But Tether is now in trouble, facing supercharged pressure from regulators and investors. It was last year fined US$18.5 million (A$26.6 million) by the New York Attorney-General for lying about its financial reserves and recent plunges in the crypto market possibly showed a taste of what could be to come.
As prices plunged in recent weeks, investors rushed to cash out their Tether, forcing the company to fork out US$10 billion (A$14.3 billion). They were able to meet the demand, with executives saying their weathered the crisis “flawlessly” but experts say the coin might not be so lucky next time.
If Tether collapses, the shockwaves could devastate the entire crypto sector, which is already in dire straits.
The crypto winter has now turned into a “polar vortex”, a senior executive at one of the world’s largest banks said in a blunt admission this week.
For the entire year, cryptocurrency has been enduring a bear run.
However, last weekend things took a turn for the worse as investors panicked following the US central bank hiking the interest rate by 75 basis points.
It prompted fears a global recession and crypto investors quickly retreated, casing a mass sell off and a drastic drop in price for some of the world’s top-ranked blockchains.
At its lowest, the number one cryptocurrency, bitcoin, fell to $US17,601.58 (A$25,300) on Sunday morning although at time of writing, it had recovered slightly, sitting on around US$20,000.
That’s a massive drop when you consider that at the start of last month, bitcoin was trading at US$36,141.33 (A$52,000), according to CoinMarketCap.
In fact, its lowest price over the last few weeks represents a whopping 74 per cent dip in value since BTC’s all-time high in November when it nearly hit US$69,000 (A$99,000) per coin.
In fact, all bitcoin’s gains over the last two years of the pandemic have pretty much been wiped – BTC hasn’t been this low since October 2020.
Although cryptocurrencies has weathered several winters and fluctuations in price, the banking pro says this one was the most extreme given how widely used blockchain now is.
Irfan Ahmad, of State Street Digital in the Asia Pacific region, told the Australian Financial Review: “This is the first time bitcoin and other cryptocurrencies have gone through such an inflationary environment.
“It is the fourth crypto winter and the most severe given wider adoption – we are referring to it as a polar vortex”.
That said, Mr Ahmad believes some of the most prominent digital tokens like bitcoin and ethereum will survive the winter.
“But as far as an asset class is concerned, we think [crypto] is here to stay,” he told the publication.
“There is going to be an evolution of the players and the protocols in the market.”
Cryptocurrency has been facing a reckoning in recent weeks – and particularly the last few days – as fears mount over a global recession amid rampant inflation and the US central bank hiking interest rates.
Data found the USA’s inflation rate had reached a new high — rising to 8.6 per cent in May, the worst its been since 1981.
The US Federal Reserve raised its interest rate to combat spiking inflation by a whopping 75 basis points.
Cryptocurrency is closely aligned with the traditional stock market and over the last week, markets like Dow Jones have tanked and entered a bear run.