Bitcoin plunges while stablecoin Terra delinks from the dollar
This week, bitcoin fell briefly below $30,000 (€28,526) for the first time in 10 months, while cryptocurrencies overall have lost nearly $800bn in market value in the past month as investors fret about tightening monetary policy.
This raises concerns about its interconnectivity with the rest of the financial system. Ireland, according to one recent survey, is among the highest bitcoin-owning countries in Europe, thanks to the ability to trade it in small sums through apps such as Revolut.
In November, bitcoin hit an all-time high of more than $68,000, pushing the value of the crypto market to $3trn. That figure halved this week.
Bitcoin accounts for nearly $600bn of that new lower value, followed by ethereum, with a $285bn market cap.
Although cryptocurrencies have enjoyed explosive growth, the market is still relatively small.
The US equity markets, for example, are worth $49trn while the Securities Industry and Financial Markets Association has pegged the outstanding value of US fixed income markets at $52.9trn as of the end of 2021.
Most of the bitcoin and ethereum in circulation is held by a select few.
An October report from the US National Bureau of Economic Research found that 10,000 bitcoin investors, both individuals and entities, control about one-third of the bitcoin market, and 1,000 investors own approximately three million bitcoin tokens.
While the overall crypto market is relatively small, the US Federal Reserve, Treasury Department and the international Financial Stability Board have flagged stablecoins, digital tokens pegged to the value of traditional assets, as a potential threat to financial stability.
Stablecoins are mostly used to facilitate trading in other digital assets. They are backed by assets that can lose value or become illiquid in times of market stress, while the rules and disclosures surrounding those assets and investors’ redemption rights are murky.
That could make stablecoins susceptible to a loss of investor confidence, particularly in times of market stress, regulators have said.
That happened on Monday, when terra USD, a major stablecoin, broke its 1:1 peg to the dollar and fell as low as $0.67, according to CoinGecko. That move partly contributed to bitcoin’s fall.
Regulators are divided on the size of the threat a crypto crash would pose to the financial system and economy.