Following Do Kwon, Three Arrows Capital and Alex Mashinsk’s trajectory for outrageous misbehaviour in the crypto space this year, Sam Bankman-Fried and FTX’s spectacular fall from grace has caused problems that will take months or years to settle.
Away from the painful realisation of the insecurities attached to centralised exchanges – not your keys, not your coins; and don’t trust, verify – people still haven’t recovered from the traumatic experience of the May Terra ecosystem crash where $UST, a supposed stablecoin lost its peg to the $1 mark. There are fears in the crypto space that we might witness the collapse of another stablecoin.
Although the effects of the FTX scandal will have a long and devastating effect on the industry, we will explore if it might lead to a stablecoin depeg.
Effect on the general market
The chaos that ensued following the FTX scandal the past week has caused much uncertainty in the market. The total capitalisation of the crypto market in the past week has dropped from $1.02 trillion to $845 billion, losing around 17% during the period, according to CoinMarketCap data at press time.
Bitcoin slipped under $16,500 for the first time in two years during the massive sell-offs. Also, On-chain data from Coinglass shows that the market liquidity has been drying up recently, which could be a matter of concern going ahead.
To make matters worse, investors have lost confidence in institutions and exchanges holding their funds and have responded by withdrawing over $3 billion in Bitcoin from exchanges.
According to data by Coinglass, an estimated 190,000 Bitcoin have been withdrawn from exchanges in the seven days since the news of FTX’s liquidity crisis broke. The 190,000 BTC is worth approximately $3 billion at Bitcoin’s current price.
Will there be an effect on stablecoins?
Last week when Binance decided not to take over the troubled crypto exchange FTX, it had a knock-on effect on the rest of the market. Tether $USDT dropped below its $1 peg to around $0.98. Other stablecoins, such as Circle $USDC, also dropped below $1.
Although these cryptocurrencies have since recovered, crypto users are still scared that more turbulence lies ahead.
Note that stablecoins are considered a more reliable alternative to traditional cryptocurrencies because their price is pegged to a real-world asset such as the US dollar. Companies behind stablecoins are supposed to keep an equivalent reserve of fiat currency so that the minimum price is guaranteed. However, there have always been questions about whether they actually do this.
Recall that Tether appointed accountants earlier in the year with a specific remit of auditing its asset reserves to try and provide additional reassurance to customers over the coin’s stability.
But earlier this year, the stability of stablecoins was called into question when Terra’s UST collapsed unexpectedly, causing the value of other digital assets to drop.
Although the debacle of both FTX and Terra looks similar, it is not likely that the FTX crash would directly cause the crash of any stablecoin. The defunct Terra ecosystem housed a supposed stablecoin $UST which became destabilised after Terra entered trouble. This is a different scenario from FTX, an exchange with $FTT as its native token and does not dish out any form of stablecoins.
To corroborate this assertion, Tether had quickly distanced itself from FTX, with CTO Paolo Ardoino taking to Twitter last Wednesday to state that his company had zero exposure to the exchange after some connected allegations.
“To be clear: #Tether does not have any exposure to FTX or Alameda. 0. Null. Maybe is time to look elsewhere. Sorry guys. Try again.”
So if you have money in stablecoins, you’re safe.
At least for now.
This content is for informational purposes only and should not be construed as investment, tax or legal advice. It is strongly recommended that every recipient seek appropriate independent professional advice before acting on any information contained herein, as Technext provides no endorsement, opinion or advice, including investment, tax or legal, and makes no representation or warranty about the suitability of a product for a particular reader or circumstance.
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