This article will examine the history of past stablecoin collapses and discuss the potential risks of USDT, and what a USDT collapse would mean for the crypto market.
TerraUSD (UST) Crash
On May 9, 2022, a certain 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 Due to concerns about the stability of UST, a large amount of funds were withdrawn from Anchor (a UST interest-bearing deposit service in the Terra ecosystem, whose APY had been stable at 20%) and UST was sold, exacerbating the downward trend.
In response, LFG (LUNA Foundation Guard) tapped its $1.5 billion stabilization fund to support prices. Terraform Lab's $1.5 billion stabilization fund is also being used to bail out the market.
Still, even with a $2 billion attempt and potential additional investment, prices continue to fall (rumor has it that Jump, Alameda, and others are offering another $2 billion to save UST). Terraform Labs is seeking an additional $1 billion from investors after Binance suspended withdrawals of UST and LUNA due to a large number of pending transactions due to congestion on the Terra (LUNA) network.
It later emerged that Do Kwon had withdrawn $2.7 billion before going bankrupt. In the latest news, the Supreme Court of Montenegro revoked the bail and extended Do Kwon’s detention period until June 16. The court will conduct a new trial based on the grounds for termination proposed by the High Court, and then make a decision on the defendant’s acceptance of bail based on the advice of the defense lawyer. Decide. Additionally, the United States and South Korea have both requested Do Kwon's extradition.
What conclusions can be drawn from this?
Avoid chasing high interest rates as they may be part of a scam.
Diversify your assets to protect against total loss of principal.
USDC anchor event
Now let’s analyze the USDC de-anchoring event that occurred in March 2023. At the height of the panic, some exchanges had Depegs reaching -25%. These situations are worth studying because they may be useful in the future—history tends to repeat itself.
The first news that caught people's attention was the sudden collapse of Silicon Valley Bank, which had been an important part of Silicon Valley's financial landscape for years.
But as soon as the news came out that Circle’s funds were stored in SVB, the USDC de-anchoring process began. The situation also had a negative impact on other stablecoins, with traders worried about their financial well-being and thus there was a massive run on the market. But USDT is not included.
The algorithmic stablecoin DAI has been most significantly affected. The reason is that DAI is 48% backed by USDC and therefore has a direct correlation to its value.
Later, Circle CEO came with some good news. It said that due to the joint rescue plan of the Federal Reserve, Treasury, and FDIC, 100% of Silicon Valley Bank’s deposits are safe and withdrawals will be open the next day after the bank resumes operations. The market panic then gradually dissipated, and the USDC price returned to near normal levels.
What conclusions can be drawn from this?
The news context deserves attention and analysis, and the collapse will not 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 in the first quarter of 2023, and the company’s excess reserves reached $2.44 billion. In their latest announcement, Tether stated that they are investing 15% of their monthly profits in BTC.
The potential collapse of USDT has been a topic of discussion in the cryptocurrency community for quite some time. While stablecoins have weathered a brutal bear market, legacy hedge funds insist USDT’s downfall is only a matter of time.
Opponents of USDT argue that Tether artificially inflates the cryptocurrency market, leading to increased speculation and giving users a false sense of value.
Supporters dispute these arguments, 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 a similar move. The trend stems from concerns about Tether’s financial health and transparency. Regulators fined Tether for unclear financial reporting, further fueling those suspicions.
Many have been eagerly awaiting updates on the audit. However, Tether is unable to provide this information. Because once announced, the U.S. government will immediately freeze the funds of banks holding Tether assets. Tether insists it is doing well, with executives calling the many speculations about its financial health a stress test.
USDT decoupling has occurred in 2017 and several other instances, with decouplings of 5-10%, but for a short period of time.
A collapse of USDT would have catastrophic consequences for the entire cryptocurrency industry, both in terms of market capitalization and as one of the most widely used assets. However, the best approach for traders is to be prepared for any situation, stay informed of the latest news, and react accordingly.
