Will Tether Fall in the Same Trap as Terra and Lose its Dollar Peg Soon?

It is unpredictable whether the leading stablecoin, Tether, will follow Terra or not in 2022

The highly volatile cryptocurrency market has experienced the most unexpected event with the most popular stablecoin, Terra (LUNA). One of the leading stablecoins has dropped drastically from US$1 for the de-pegging issue at 99.7%. LUNA is known for suffering the biggest losses in 2022 for just shifting the rank from within the top ten cryptocurrencies to the rank 253. Meanwhile, another stablecoin, Tether (USDT) has been experiencing the speculation about whether it will fall into the same trap as Terra (LUNA) to drop the price below US$1.

Tether is known as a reserved-backed stablecoin pegged 1:1 to the US dollar in the highly volatile and fluctuating cryptocurrency market. It was believed that stablecoins such as LUNA and USDT will not act as a systemic risk to the global financial system and those which have the utmost stability, despite being in the highly fluctuating ecosystem. Meanwhile, Terra is known as an algorithmic stablecoin pegged 1:1 to the US dollar and is focused on maintaining its dollar peg with a complex mechanism.

Tether has started slipping below the 1:1 dollar peg while hitting the low of 95% in the second week of May 2022. The management of USDT has mentioned that the stablecoin has decreased the exposure to the commercial paper while holding the majority of the U.S. Treasuries reserves. Currently, USDT is one of the leading stablecoins in the third position out of all cryptocurrencies. The current price is US$0.9993 with a market cap of US$74.15 billion and a volume of US$60.05 billion.

Crypto investors are still in limbo whether Tether will follow the same pattern of Terra because of the spillover effect into other stablecoins. The real worry is that till May 2022, crypto investors used to believe that the fluctuating behaviour of the other cryptocurrencies will not affect the stability of these popular stablecoins. But post-LUNA effect, the USDT has also started showing the signs of similar pattern.

Stablecoins are known for playing a key role in multiple decentralized applications working on blockchain technology. Tether consists of 85% reserves in cash and cash equivalents while the rest in other forms of assets like corporate bonds and digital tokens. It has been observed that quarterly updates of USDT do not provide any timely insight on issues like liquidity for a portfolio with short-maturity assets. It is expected that Tether will not fall into the trap like Terra because it has boosted the amount of treasury holding for over 50% of the company's assets. It is reducing the commercial debt to respect the investments of crypto investors in the highly volatile cryptocurrency market.

Thus, the behaviour of the cryptocurrency market including stablecoins is hard to predict but there have been concerns related to whether Tether (USDT) is headed towards the same path as Terra (LUNA) post-de-pegging issue.