Tether Crash: Will It Take The Same Path As Terra?

What Really Led to the Tether Crash?

Tether’s bearish market and drop in value to a low of 94% (94 cents) in the second week of May, has led to speculations on whether Tether will crash as irrevocably as Terra has. This began when for a brief amount of time, liquidity pools allowing users to swap Terra with other assets were nearly empty. Panic ensued as people interpreted this as the stablecoin trading below the peg. Since USD was falling very steeply at the time, the prospect of a Tether crash seemed likely.

However, the former company has promised savers $1 for every coin they give back to the company, regardless of the current market value. Tether has only allowed direct withdrawals of a minimum of $100,000 per request and charges a 0.1% fee on each redemption. Any coin holder that possesses less than the minimum can only convert their assets into dollars by selling them to other investors.

Despite the skepticism of the company's plan and fear of their ability to honor all incoming redemptions, more than $10 billion has been reallocated in this manner since the short-lived crisis on Thursday. Nearly 300 million tether tokens were redeemed for $1 since then, placating Terra users everywhere. Tether has boosted its treasury holding for over 50 of the company's total assets and is reducing its commercial debt to respect its user's investments in the currently highly-fluctuating cryptocurrency market.

The Way Forward

Cryptocurrency investors and analysts are still in limbo regarding whether Tether will go down the same rabbit hole as TerraUSD, but for now, the stablecoin's status in the market is relatively less volatile than Terra, Bitcoin, and other cryptocurrencies.

Stablecoins are known for being a crucial part of many DeFi applications and blockchain technology in general. The jitters surrounding stablecoins have shown a big slump in stocks and have triggered multiple crises across the crypto sector. A failure or catastrophe in one area of crypto almost always leads to various users misreading situations, and overcorrecting in manners that are largely detrimental to the community. One stablecoin's downfall has led people to extrapolate that anything related to it is shaky and tenuous. But since each stablecoin has its own design, different factors will not necessarily affect them all in the same way. Tether was not backed by a fiat currency held in reserves, unlike Terra. It instead relied on complex algorithms, hence its price stability was maintained amidst the flailing market.

Tether's large role in the financial engineering of the crypto sector led to fear of contagion if it collapses. But the company's commitment and consequent reduction of its commercial paper investments have helped the stablecoin maintain its stability throughout multiple black swan events. Users have been assuaged by reassurances and proof of its creditworthiness, as it continues to trade as it was before.