Bitcoin Sets in Record Loss Streak After ‘Stablecoin’ Crash

SINGAPORE/HONG KONG/LONDON, May 13 (Reuters) – Cryptocurrencies took a big loss on Friday, with Bitcoin just above $30,000 and bracing for a record loss after the collapse of TerraUSD, the so-called stablecoin, that proliferated in cryptocurrency markets.

Crypto assets were also swept up in a massive sell-off of risky investments due to fears of rising inflation and higher interest rates. Sentiment is particularly fragile, as currencies that are supposed to be pegged to the dollar have faltered.

Bitcoin, the largest cryptocurrency by total market capitalization, managed to bounce back in the Asian session and was trading at $30,335 at 0843 GMT. It made some kind of recovery from the 16-month low of around $25,400 reached on Thursday.

But it’s still well below last week’s levels of about $40K, and unless there is a recovery in the weekend’s trading, it is heading for a record seventh consecutive weekly loss.

“I don’t think the worst is over,” said Scotty Siu, chief investment officer at Axion Global Asset Management, a Hong Kong-based company that operates a crypto index fund.

“I think there is more pullback in the coming days. I think what we need to see is the collapse of open interest much more, so the speculators are already out, and that is when I think the market will stabilize.”

Beyond Bitcoin

Cryptocurrency-related stocks have been bombed, with shares in broker Coinbase (COIN.O) Steady overnight but still halving in just over a week.

In Asia, Huobi Technology listed in Hong Kong (1611.HK) and BC Technology Group (0863.HK)which operates trading platforms and other crypto services, is down more than 20% weekly.

But the broader financial markets have so far seen little to no detrimental impact from the cryptocurrency crash.

“Cryptocurrencies are still small, and the integration of cryptocurrency into the broader financial markets is still very small,” said James Malcolm, Head of FX Strategy at UBS.

“This idea that what happens in cryptocurrency stays in crypto — and that is in many ways where we are at the moment.”

Staplecoin Squeeze

The sell-off has nearly halved the global market cap of cryptocurrencies since November, but the pullback has turned into panic in recent sessions as the stablecoins weighed.

Stablecoins are tokens tied to the value of traditional assets, often US dollars, and are the primary means of moving funds between cryptocurrencies or for converting balances into fiat money. Read more

Cryptocurrency markets were shaken this week by the crash of TerraUSD (USDT), which broke its correlation with the dollar in a 1:1 ratio.

The coin’s complex stabilization mechanism, which involved balancing with a free cryptocurrency called Luna, stopped working when Luna came under selling pressure. TerraUSD last traded around 15 cents, while Luna is down close to zero. Read more

Tether, the largest stablecoin that developers say is backed by dollar assets, also came under pressure and fell to 95 cents on Thursday, according to CoinMarketCap data, but returned to $1 on Friday. Read more

“More than half of all bitcoin and ether traded on exchanges are against stablecoin, with USDT or Tether taking the largest share,” Morgan Stanley analysts said in a research note.

“For these types of stablecoins, the market needs to trust that the issuer has enough liquid assets that they can sell in times of market stress.”

Operator Tether says it has the necessary assets in Treasuries, cash, corporate bonds and other money market products.

But Tether will likely face further tests if traders continue to sell, and analysts fear the pressure will spill over into financial markets if pressure forces more and more liquidations.

Rating agency Fitch said in a note Thursday that there could be “significant negative repercussions” for cryptocurrencies and digital finance if investors lose faith in stablecoins.

“Many regulated financial entities have increased their exposure to cryptocurrency, bullying and other forms of digital finance in recent months, and some Fitch-rated issuers could be affected if cryptocurrency market volatility becomes severe,” she said.

However, Fitch said that weak links between crypto markets and regulated financial markets will limit the potential for volatility in the cryptocurrency market to cause broader financial instability.

(Reporting by Tom Westbrook and Elon John). Editing by Bradley Perrett and Emilia Sithole Mataris

Our criteria: Thomson Reuters Trust Principles.