Cryptocurrencies suffered heavy losses on Friday, with Bitcoin back above $30,000 and still poised for a record losing streak after the collapse of so-called stablecoin TerraUSD, which rippled through cryptocurrency markets.
Crypto assets have also been dragged into the massive sell-off of risky investments due to concerns over high inflation and rising interest rates. Sentiment is particularly fragile as tokens that are supposed to be pegged to the dollar have faltered.
Bitcoin, the largest cryptocurrency by total market value, managed to rebound during the Asian session and traded at around $30,500 as of 11:40 GMT. It staged some kind of rally after a 16-month low of around $25,400 hit on Thursday.
But it remains well below levels a week ago of around $40,000 and, barring a rebound in weekend trade, is heading for a record seventh consecutive weekly loss.
“I don’t think the worst is over,” said Scottie Siu, chief investment officer of Axion Global Asset Management, a Hong Kong-based firm that manages a crypto index fund.
“I think there are more downsides in the next few days. I think what we need to see is that open interest is collapsing a lot more, so the speculators are really off, and that’s when I think the market will stabilize.
Crypto-related stocks took a hit, with shares of broker Coinbase COIN.O stabilizing overnight, but still down by half in just over a week.
In Asia, Hong Kong-listed Huobi Technology 1611.HK and BC Technology Group 0863.HK, which operate crypto trading platforms and other services, saw weekly declines of more than 20%.
But the broader financial markets have so far seen little ripple effect from the cryptocurrency crash.
“Crypto is still tiny, and the integration of crypto into broader financial markets is still infinitesimally small,” said James Malcolm, head of FX strategy at UBS.
“This idea that what happens in crypto stays in crypto – that’s in many ways where we’re still at at the moment.”
The selloff has roughly halved the global cryptocurrency market value since November, but the pullback has turned into a panic in recent sessions with pressure on stablecoins.
Stablecoins are tokens pegged to the value of traditional assets, often the US dollar, and are the primary means of transferring money between cryptocurrencies or converting balances into fiat cash.
Cryptocurrency markets were rocked this week by the collapse of TerraUSD (UST), which broke its 1:1 peg to the dollar.
The coin’s complex stability mechanism, which involved balancing with a floating cryptocurrency called Luna, stopped working when Luna came under selling pressure. TerraUSD last traded around 9 cents, while Luna dipped near zero.
Tether, the biggest stablecoin and the one whose developers say is backed by dollar assets, also came under pressure and fell as low as 95 cents on Thursday, according to data from CoinMarketCap, but was back down to $1 on Friday. .
“More than half of all bitcoin and ether traded on exchanges are against a stablecoin, with USDT or Tether taking the largest share,” Morgan Stanley analysts said in a research note.
“For these types of stablecoins, the market must have confidence that the issuer holds enough liquid assets that it would be able to sell during times of market stress.”
Tether’s operating company says it has the necessary assets in treasury bills, cash, corporate bonds and other money market products.
But Tether is likely to face further tests if traders keep selling, and analysts fear the stress could spill over into currency markets if the pressure increasingly forces a sell-off.
Ratings agency Fitch said in a note on Thursday that there could be “significant negative repercussions” for cryptocurrencies and digital finance if investors lose confidence in stablecoins.
“Many regulated financial entities have increased their exposure to cryptocurrencies, challenge and other forms of digital finance in recent months, and some Fitch-rated issuers could be affected if volatility in the crypto market becomes harsh,” he said.
However, Fitch said weak ties between crypto markets and regulated financial markets will limit the potential for crypto market volatility to cause broader financial instability.