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Title: Bitcoin's 2021 gains wiped out in stablecoin rout

May 12, 2022 04:51AM ET

By: AnalysisWatch

Cryptocurrencies continued their sell-off on Thursday, with Bitcoin falling to its lowest level in 16 months, as a rush to buy the so-called stablecoins sent shockwaves across broader markets.

The latest blow to Bitcoin and its smaller rival Ether, which has already lost more than half its market value this year, came from a collapse this week in TerraUSD, also one of the world's biggest cryptocurrencies.

Bitcoin fell to a low of $25,401.05, its lowest level since 28 December 2020, and has lost a third of its value, or $13,000, in the last eight sessions and is down more than 45% so far this year.

Stablecoins are digital tokens pegged to the value of traditional assets like the US dollar. They are popular in times of turmoil in crypto markets and are often used by traders to move funds and speculate on other cryptocurrencies.

Unlike most stablecoins, which are backed by reserves, TerraUSD is an algorithmic or "decentralised" stablecoin. It should maintain its peg through a complex mechanism where it is swapped with another free-floating token.

But even stablecoins with reserves that say they have sufficient assets to maintain their bindings showed signs of stress on Thursday.

Key stablecoin Tether slipped below its dollar peg at 0732 GMT on Thursday, hitting a low of 98 cents, according to CoinGecko. USD Coin was trading at around $1.04, while Binance USD was at $1.07 - a significant breakout from its usual range.

Market participants are still assessing the impact of TerraUSD's collapse to determine if large companies or investors were severely hurt. This would be a possible indication of broader contagion.

Ether, the world's second-largest cryptocurrency, plunged nearly 15% to $1,700 on Thursday, its lowest level since June 2021.

Unlike previous sell-offs in broad financial markets, where cryptocurrencies were largely unaffected, this time the selling pressure on these assets has undermined the general argument that they are reliable stores of value in times of market volatility.

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