Notes 6/15: Tether Loses Peg, Bitcoin and Tether Dominance

Algorithmic stablecoin Tether lost its peg briefly amid trader selloffs of USDT at Curve Finance, a liquidity pool that operates in decentralized finance (DeFi) markets, this morning. According to Coinmarketcap, a site owned by Binance – an exchange where Tether records its biggest volumes, the stablecoin was trading as low as $0.9968. While its peg is always slightly askew to enable profits for traders, Tether generally trades in the $0.998 to $0.999 range.

A Liquidity Pool Curveball

Most reports attribute the stablecoin’s loss of peg to an imbalance in Curve Finance’s stablecoin liquidity pool 3pool. Traders sold off their holdings of the stablecoin in favor of Circle’s USDC and MakerDao’s DAI. The cause for their selloff is not clear but the last two times a massive Tether selloff occurred was during the FTX implosion in November and the Terra/Luna crash in May.

Crypto markets are wracked by thin liquidity currently, meaning it is relatively easy for traders to move prices using a relatively small number of tokens. Instability in Tether pegs also translates to so-called redemptions or burns of the stablecoin to bring it back in line with the intended $1 peg. [ Whether those redemptions actually occur is an open question].

However, those burns further shrink liquidity between tokens because Tether greases most transactions in cryptocurrency markets. A domino effect, not an uncommon occurrence in crypto lately, could tip its ecosystem into another crisis.

Bitcoin Price Falls

In clockwork fashion, Tether’s algorithmic counterpart, Bitcoin, is also edging lower. The cryptocurrency’s price curled about in its trading range of between $25,000 to $26,000 even after the Federal Reserve announced a pause in rate hikes.

But it fell below $25,000 a couple of hours later. As of this writing, it is changing hands at $25,395.76, down 2% from its price a day earlier.

A possible reason being offered for the price decline is the prospect of an aggressive Fed stance in the future. But delayed price reactions are hardly the best explanations for an ecosystem that claims to implement instant settlements.

Bitcoin and Tether Dominance Surges

On a related note, the two tokens, bitcoin and tether, dominate crypto trading volumes. Bitcoin dominance reached almost 50% last week after the Securities and Exchange Commission (SEC) filed lawsuits against Coinbase and Binance alleging a slew of coins other than bitcoin were securities.

Tether continues to set new records for total market cap. As of this writing, it is $83.49 billion. It also announced more ammunition to shore up crypto markets by minting $1 billion worth of tokens on Ethereum.

Again, casting about in crypto’s history, the last time that Tether and Bitcoin held such a sway over crypto markets was at the beginning of 2018. Bitcoin had just set a new price record while an altcoin season, powered by the Tether engine, was to follow shortly thereafter. That must presage good news. Not quite. Back then, liquidity was flowing into crypto, instigated by curiosity about the asset.

As things stand right now, crypto trading markets are a shadow of their earlier self. Traders have booked their profits and are fleeing. Liquidity is approaching all-time lows. And Tether and bitcoin have been heavily damaged due to battles with regulators. This time around, the blanketing of crypto markets by the two tokens may not be an augur of good times.

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