Cryptocurrencies stabilized on Friday, with bitcoin BTK22 recovering from a 16-month low after a volatile week dominated by the collapse of the value of TerraUSD, the so-called stablecoin.
Crypto assets have been swept up in a massive sell-off of risky investments amid fears of rising inflation and rising interest rates. But the broader financial markets have so far seen little to no detrimental impact from the cryptocurrency crash.
“Cryptocurrencies are still small, and their integration into the broader financial markets is still very small,” said James Malcolm, head of forex strategy at UBS.
Weak links to regulated financial markets will limit the potential for cryptocurrency market volatility to cause broader financial instability, rating agency Fitch said in a note Thursday.
Bitcoin, the largest cryptocurrency by market capitalization, rose 3.5 percent to $29,884, rebounding from December 2020, down from $25,400 it reached on Thursday.
But despite hitting a high of just under $31,000 on Friday, Bitcoin is still well below the previous week’s levels of around $40,000, and unless there is a big rally at the end of the week, it is on track for its seventh weekly loss. Straight.
Barry Bannister, chief equity strategist at Stifel, said bitcoin still has an additional downside to around $15,000.
Bitcoin is also sensitive to GDP, because Bitcoin drops when the Manufacturing PMI falls, as we expect [into the third quarter of 2022]Noting that the latest Bitcoin capitulation decline may still be in the future.”
Ether, the second largest cryptocurrency by market capitalization, also gained, jumping 5.8 percent to $2,068.
Tether, the largest stablecoin that its developers say is backed by dollar assets, is back at $1, after dropping to 95 cents on Thursday.
However, the supposedly dollar-pegged stablecoin TerraUSD continued to weaken at 11 US cents, according to data tracker CoinGecko. It has been unpegged to the US currency since May 9.
CoinGecko data showed that the total market value of the crypto sector rose 5.6 percent to $1.4 trillion on Friday.
Cryptocurrency-related stocks were hit hard with the market crash, but on Friday, the Coinbase broker was up 23 percent to $72.12, although it was still down 30 percent on the week.
In Asia, Huobi Technology and Hong Kong-listed BC Technology Group, which operates other crypto exchanges and services, saw a weekly decline of more than 20 percent.
The sell-off has nearly halved the global market cap of cryptocurrencies since November, but the pullback has turned into panic in recent sessions as the stablecoins weighed.
Stablecoins are tokens tied to the value of traditional assets, often US dollars, and are the primary means of moving funds between cryptocurrencies or for converting balances into fiat money.
Cryptocurrency markets were shaken this week by the crash of TerraUSD, which broke its correlation with the dollar at a 1:1 ratio.
The currency’s complex stabilization mechanism, which involved balancing with a free-floating cryptocurrency called Luna, stopped working when Luna dropped close to zero.
“For these types of stablecoins, the market needs to trust that the issuer has sufficient liquid assets that it can sell in times of market stress,” analysts at Morgan Stanley said in a research note.
The operator of another stablecoin called Tether said it has the necessary assets in Treasuries, cash, corporate bonds and other money market products.
But stablecoins are likely to face further tests if traders continue to sell, and analysts are concerned that the tension could spill over into financial markets if there is more and more liquidation.
Fitch said cryptocurrency and digital finance could face “significant negative repercussions” if investors lose faith in stablecoins, as many regulated financial entities have increased their exposure to the sector in recent months.
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