Following the recent Terra Luna Crypto crash and the USDD depeg, it seems that the current crypto season is not favouring stablecoins at all, but could USDT depeg?
The bearish market trend continues to swirl around Tether, with fears of a USDT depeg circulating among the crypto community. While Tether remains close to its $1, it dropped lower earlier this year.
The shaky movement of crypto and stablecoins has led investors to question whether it could lose its peg to the dollar. Let's take a look at what would happen if Tether loses its peg after all?
Could Tether Depeg Like Luna and USDD?
The most recent questions around Tether came from both the USDD depeg, and Celsius Network. Here, the network had to halt its withdrawals citing extreme market conditions.
Alongside other market conditions, this also ended up affecting the overall cryptocurrency market cap. This fell below $1 trillion on June 13. Following the rising bearish market trends, Tether slightly lost its peg to $1, dropping to $0.9984 - still, not much.
However, the Luna crypto crash had a more severe impact on Tether. USDT dropped as low as $0.9704. However, USDT quickly redeemed its slot, rising above turbulent waters and re-pegging.
The bearish market trends continue to prove lethal to the stablecoin infrastructures. With rising inflation and waning interest, the USDT could depeg catastrophically depending on its collateralization and holders exiting.
Tether continues to share some details about its cash reserves. The reserves are pools of funds that effectively back the USDT stablecoin in case of emergency market volatility. At the moment, Tether claims to have reserve values of $70 billion, which can be deployed to maintain the USDT peg to the US dollar in times of extreme market distress.
Tether has also vanquished rumours concerning its commercial paper holdings. In an updated blog statement, Tether announced said:
These rumors are completely false and likely spread to induce further panic to generate additional profits from an already stressed market. Tether condemns such attempts which oftentimes see simple users take the biggest hit, while few coordinated funds increase their profits.
In its fund breakdown, Tether announced it has 47% of the total USD reserves in US treasuries and that only 25% make up the total commercial paper holdings
What Would Happen If USDT Depegged?
Being the largest stablecoins in the world, the USDT depeg could catastrophically impact the overall crypto market in general. Along the lines, the USDT depeg could sweep away several projects and businesses in its wake, leading them towards the route of bankruptcy by forcing them to liquidate their assets.
A USDT depeg could impact the overall crypto ecosystem with the so-called "contagion effect," being rampant in the system.
However, unlike UST, USDT is backed by fiat reserves. This means it does not have an element of algorithmic stablecoin attached to maintain its 1:1 peg to the US dollar. It is this element that spurred the UST depeg in such a brutal fashion.
In addition to this, USDT has a wobbly price history where the stablecoin has documented several ups and downs in its pricing. However, these price spikes were generally short-lived and did not have any prolonged effect on Tether's overall market value.