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Crypto: Stablecoin storm spreads after billions of tether is cashed out

Smartphone with Tether logo
A smartphone with Tether logo on it. Reuters/Dado Ruvic/Illustration

Crypto's stablecoin storm spreads as $7.6bn of USD tether is redeemed in the past week. The cashout looks likely to continue on Tuesday with impact on all major tokens including bitcoin.

On Tuesday the top two cryptocurrencies by market cap, bitcoin and ethereum, rallied 3% in 24 hours, with BTC at $30,667 and ETH at $2,091.

The cash-out of tether (USDT-USD) by crypto investors has escalated since the LUNA/UST crash last Wednesday.

The dramatic crash saw the algorithmic stablecoin UST terra, which had been pegged to the dollar one to one, fall to a low of $0.1.

A stablecoin is supposed to be a stable safe haven for investors to park their profits amid the volatility of the cryptocurrency market.

However, cryptocurrency investors now find they have nowhere to go amid signals of further volatility.

No stablecoin seems safe at the moment, and the only option is to hold blue-chip cryptos, such as bitcoin (BTC-USD) and ethereum, or cash out of the whole ecosystem into a traditional bank account.

The crisis deepens as ethereum, the second-biggest cryptocurrency by market cap, has fallen about 60% from its November record.

Read more: Crypto live prices

According to technical analyst John Roque of 22V Research, ethereum (ETH-USD) could drop another 80%.

Ethereum currently stands at $2,074, but Roque's downside target is around $420.

However, both bitcoin and ethereum have risen by around 3% in value in the last 24 hours, which would suggest wary cryptocurrency investors are parking their money in these blue chips until the current 'stablecoin' storm resides.

The market cap of tether has been dropping considerably since the blow-up of the USDT terra algorithmic stablecoin.

Tether's market cap has fallen from $85bn before the 'stablecoin storm', to a current value of $76bn

USDT, or tether, should not be confused with UST, called terra, which was the algorithmic stablecoin that crashed last Wednesday.

Unlike the UST terra algorithmic stablecoin, USDT tether is backed by US dollars as collateral.

However, its reserves are a point of controversy and only a fractional amount of the $4 of tether in existence may be redeemed for actual US dollars.

On Monday, the New York Supreme Court rejected Tether’s petition to block the public from receiving documents detailing the composition of its dollar reserves.

The recent crypto-market crisis involving stablecoins has caused industry experts to call for strong regulation, especially of stablecoins.

Read more: 'Crypto lobby groups are dictating terms in Washington'

Speaking to Yahoo Finance, London-based fintech investor Viktor Prokopenya said: “Regulation will bring transparency to the market and end bad practices. Like all young technologies - crypto is only about a decade old, the industry has to grow up and out of its existing ways.

"The recent collapse of terra and tether and other stablecoins have shown a lack of transparency and an ironic ‘instability’ in a supposedly more ‘stable’ cryptocurrency."

The news comes as the UK Treasury is en route to legalise the use of stablecoins.

Last month HM Treasury tweeted: "Economic Secretary John Glen announced today that stablecoins will be brought into UK payments regulation.

"This places the UK financial services sector at the forefront of technology, creating conditions for stablecoin issuers and service providers to operate and invest."

Watch: Steve Hanke on crypto-lobbyists