Review the history of stablecoin crashes and analyze the potential risks of USDT

USDT is the sword of Damocles hanging over crypto traders?

Written by: Splin Teron, Crypto KOL

** Compilation: Felix, PANews**

This article examines the history of past stablecoin crashes and discusses the potential risks of USDT and what a USDT crash would mean for the crypto market.

TerraUSD (UST) Crash

On May 9, 2022, a giant whale sold a large amount of UST, causing its price to fall below $1. Due to concerns about the stability of UST, a large amount of funds on Anchor (the UST interest-earning deposit service in the Terra ecosystem, whose APY was once stable at 20%) were withdrawn and UST was sold, which exacerbated the downward trend.

In response, LFG (LUNA Foundation Guard) mobilized a $1.5 billion stabilization fund to support prices. Terraform Lab's $1.5 billion stabilization fund was also used to rescue the market.

Still, even with a $2 billion attempt and potential supplemental investments, prices have continued to drop (Jump, Alameda, etc. are rumored to have offered another $2 billion to rescue UST). Binance suspended the withdrawal of UST and LUNA due to the congestion of Terra (LUNA) network, which caused a large number of pending transactions to accumulate, and then Terraform Labs pursued investors for an additional $1 billion.

It was later revealed that Do Kwon had withdrawn $2.7 billion before bankruptcy. In the latest news, the Supreme Court of Montenegro revoked the bail and extended Do Kwon's detention until June 16, the court will rehear the case based on the grounds for termination proposed by the High Court, and then make the defendant's acceptance of bail on the recommendation of the defense lawyers. Decide. In addition, both the United States and South Korea have requested the extradition of Do Kwon.

What conclusions can be drawn from this?

• Avoid chasing high interest rates as it may be part of a scam.
• Diversification of assets to prevent total loss of principal.

USDC unanchor event

Now analyze the USDC unanchoring event that occurred in March 2023. At the height of the panic, Depeg reached -25% on some exchanges. These situations are worth looking into as they may be informative in the future - history tends to repeat itself.

The first news that caught people's attention was the sudden collapse of Silicon Valley Bank, a bank that had been a big part of Silicon Valley's financial landscape for years.

But as soon as the news that Circle's funds were stored in SVB came out, the USDC de-pegging process began. The situation has negatively impacted other stablecoins as well, with traders fearing for their finances and as a result, there has been a massive run on the market. But USDT is not included.

The algorithmic stablecoin DAI has been most affected. The reason is that DAI is 48% backed by USDC and therefore has a direct correlation to its value.

Later, the Circle CEO delivered some good news. Said that due to the introduction of the joint rescue plan of the Federal Reserve, the Ministry of Finance, and the FDIC, 100% of Silicon Valley Bank's deposits are safe, and withdrawals will be opened the next day after the bank resumes business. Then the market panic gradually dissipated, and the price of USDC returned to a level close to usual.

What conclusions can be drawn from this?

The news background deserves attention and analysis, and the crash won't happen overnight.

USDT

Now let’s discuss USDT. According to the latest data, USDT dominates the stablecoin space with a 64.978% market share.

USDT issuer Tether reported net income of $1.5 billion for the first quarter of 2023, with the company’s excess reserves reaching $2.44 billion. In their latest announcement, Tether stated that they invest 15% of their monthly profits in BTC.

The potential collapse of USDT has been a topic of discussion in the cryptocurrency community for a long time. While stablecoins have withstood the harsh bear market, traditional hedge funds insist that USDT’s downfall is only a matter of time.

Opponents of USDT argue that Tether has artificially inflated the cryptocurrency market, leading to increased speculation and giving users a false sense of value.

Proponents have countered these views, but it has made investors more cautious when dealing with Tether.

Hedge funds have been shorting Tether for years, and now more institutional investors are considering similar moves. This trend is driven by concerns about Tether's financial health and transparency. Regulators have fined Tether for unclear financial reporting, further fueling those suspicions.

Many have been eagerly awaiting an update on the audit. However, Tether cannot provide this information. Because once announced, the US government will immediately freeze the bank funds holding Tether assets. Tether insists it is doing well, with executives calling the many speculations about its finances a stress test.

The decoupling of USDT has happened in 2017 and several other examples, the decoupling rate is 5-10%, but the decoupling time is very short.

In terms of market capitalization and being one of the most widely used assets, a collapse of USDT would have disastrous consequences for the entire cryptocurrency industry. However, the best approach for a trader is to be prepared for any situation, stay informed about the latest news, and react accordingly.