Crypto is creaking. Unfortunately, even those fund managers in normal markets like stocks and bonds who have studiously avoided focusing on this freewheeling asset class, need to pay attention.
A trickle lower from a peak above $68,000 in the bitcoin price has turned into a flood, in part because of cracks in the so-called stablecoins — a misnomer if ever there was one — that glue the market together. Right now the price is down to around $27,000.
Yes, crypto bros, before you email me with your all-caps missives (again), I am aware that some people are still up on their investments. It is entirely plausible that the market can recover from this, just as it has done from numerous previous challenging episodes.
Say what you like about crypto, it has a dedicated fan base and impressive staying power. But anyone who got in after the end of 2020 is now under water and the drivers of this decline seem structural. Even some who have sipped the Kool-Aid accept this time may be different.
So, who cares? Well, it is sad for the people, often young and with meagre means, who ignored all the warnings and put their life savings in to jaunty crypto coins, lured in by claims that these lines of code could become serious rivals to the dollar and the basis of a new financial utopia. It is awkward for the boosters who tried to convince institutional investors that bitcoin is a hedge against inflation, which it plainly is not. El Salvador’s crypto fanatic president, Nayib Bukele, may need to downgrade his grand plans for Bitcoin City to Bitcoin Town.
The open question is whether it all matters for traditional markets, which are already suffering a wobble of their own. Will it move stocks and bonds?
Typically, what happens in crypto stays in crypto. But big moves can cut through. A regulatory crackdown from China almost exactly a year ago sparked a fleeting 30 per cent crash in the price of bitcoin and left German government bond watchers bemused to see their market pick up on a flight to safety.
One banker tells me his hedge fund clients are watching closely now, with several taking seriously the possibility that a big crash in crypto, if it happens, could be supportive for that most crucial of markets, US government bonds, again on the notion that it would spark a rush to safer places to park cash.
So the question is whether we are heading for a rerun of the 30 per cent crash last year. Signs that tether is under strain add to the sense that this decline in price could be The Big One. The stablecoin, which operates almost like a central bank for the crypto market, has seen cracks emerge in its dollar peg after a much smaller stablecoin, TerraUSD, went into meltdown earlier this week. The two tokens work differently, but the nuance is largely the narcissism of small differences. Either these things can maintain a one-for-one peg with the dollar or they can’t. If they can’t, then the belief system underpinning crypto is in trouble.
Tether also potentially matters to broader markets through a different channel. Its dollar peg is maintained not through algorithmic wizardry, like TerraUSD. Instead it claims to back the link with the buck using good old-fashioned reserves. Details on what exactly is in those reserves have been scant, and not subjected to widely accepted accounting norms. But in theory, they run to $80bn, matching the amount of tether tokens in circulation.
Last year, rating agency Fitch warned that if tether holders were to fold and seek to flip their tokens into real money, then that could destabilise the short-term credit markets where the company says it holds lots of funds.
“The rapid growth of stablecoin issuance could, in time, have implications for the functioning of short-term credit markets,” Fitch’s analysts said, pointing to “potential asset contagion risks linked to the liquidation of stablecoin reserve holdings”.
Credit markets are already wobbling under the pressure of a shift higher in benchmark interest rates. The notion that Tether could, if push came to shove, offload chunks of its claimed $24bn stash of commercial paper, $35bn hoard of US Treasury bills or $4bn pile of “corporate bonds, funds and precious metals” into these market conditions is potentially unhelpful.
Now would be a good time for Tether to say, in more detail and nicely up-to-date, what’s in the box. This would help investors understand where the vulnerabilities lie and put concerns over its backing to bed.
Paolo Ardoino, Tether’s chief technology officer, said on a Twitter chat on Thursday that the group was prepared to “maintain the US dollar peg at all costs”. He said tether had recently been purchasing “a ton” of US government bonds and was prepared to sell them to defend the token.
Debt investors, already bruised after a tumultuous year so far, would be wise to watch closely.