The entire UST scandal has led to traders becoming more enraged at stablecoins. This led to investors chasing the pegs for stablecoins like USDT, and trying destabilize them. Tether USD was the biggest beneficiary of all this, as the peg that it had to the U.S. Dollar was severely challenged. This suggests more volatility could be on the horizon.
The Tether Challenge is ramping up
It is important to remember that these types of problems are often triggered by extreme market stress or liquidations. This was the situation in the week following the UST depegging. When it comes down to the $1 peg, this causes large price swings for stablecoins like USDT or USDC. The majority of deviations in this instance were in USDT, as USDC was more stable in the market.
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After the UST news, Tether (USDT), which had always been under intense scrutiny by some market participants, began trading below $1. The gap would widen over time, but the stablecoin would be able to regain its $1 peg. The market was clearly attracted to the stablecoin because of its transparency.
USDT suffers a dollar-price loss following the UST crash. Source: USDT/USD tradingview.com| Source: USDT/USD on TradingView.com
Funds that have access to Tether redemptions had been inadvertently given an opportunity. This had allowed these funds to profit from the slight de-pegging until Tether redemptions could be restored to their 1:1 peg.
Is there more volatility coming?
The market witnessed one of its highest levels in one day volatility on Thursday. Although volatility caused by large sell-offs in the market on Thursday, volatility has decreased since.
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There may still be volatility, however, as the USDT peg is constantly challenged on the market. USDT is the current largest stablecoin on the market and would likely have a greater impact than UST if it lost its peg. This de-pegging could cause market volatility to increase as USDT collateral is used for more than half the open interest in derivatives markets.
It also has one of the largest trading pairs out of all stablecoins. De-pegging may lead to short squeezes at historical levels, which would effectively cripple the market. A de-pegging like this could also cause widespread rejection for years, as people become more fearful about the market.
Source: Arcane Research| Source: Arcane Research
Featured Image from CoinGeek. Charts from Arcane Research and TradingView.com.