What happens in crypto may not stay in crypto this time around

The open question is whether any of this matters for traditional markets, which are already suffering from their own swings. Will this move stocks and bonds?

Generally, what happens in crypto stays in crypto. But big moves can pass. A regulatory crackdown from China almost exactly a year ago triggered a fleeting 30% drop in bitcoin’s price and left German government bond watchers puzzled as their market resumed a flight to safety. .

A banker tells me that his hedge fund clients are watching closely now, with many taking seriously the possibility that a big crypto crash, if it occurs, could support the most crucial of markets, US government bonds, again on the notion that it would trigger a rush to safer places to park cash.

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So the question is whether we are headed for a repeat of last year’s 30% crash. The signs that the tether is under tension add to the impression that this price drop could be “The Big One”. The stablecoin, which functions almost like a central bank for the crypto market, saw cracks emerge in its dollar peg after a much smaller stablecoin, TerraUSD, crashed earlier this week. The two tokens work differently, but the nuance is largely the narcissism of the small differences. Either these things can maintain parity with the dollar or they cannot. If they can’t, then the belief system that underpins crypto is in trouble.

Tether is also potentially important for larger markets through a different channel. Its peg to the dollar is not maintained by algorithmic magic, like TerraUSD. Instead, it claims to support the link to the dollar using good old-fashioned reserves. Details on the exact content of these reserves are scarce and are not subject to widely accepted accounting standards. But in theory, they amount to $80 billion, which is the number of tether tokens in circulation.

Last year, ratings agency Fitch warned that if tether holders pull back and seek to turn their tokens into real money, it could destabilize short-term credit markets where the company says it holds a lot of funds. .

“The rapid growth in stablecoin issuance could ultimately have implications for the functioning of short-term credit markets,” Fitch analysts said, noting “potential asset contagion risks related to the liquidation of stablecoin reserves”.

Credit markets are already reeling from the pressure of higher benchmark interest rates. The idea that tether could, if the push were to push, unload chunks of its $24 billion stash of commercial paper, $35 billion of U.S. Treasuries, or $4 billion of “treasury bonds.” ‘companies, funds and precious metals’ in these market conditions is potentially useless.

Now would be a good time for tether to say, in more detail and up-to-date, what’s in the box. This would help investors understand where the vulnerabilities lie and allay concerns about its support.

Paolo Ardoino, tether’s chief technology officer, said in a Twitter chat on Thursday that the group was ready to “maintain the US dollar peg at all costs.” He said Tether recently bought “a ton” of US government bonds and was ready to sell them in defense of the token.

Bond investors, already battered after a tumultuous year so far, would do well to watch closely.

FinancialTimes

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