Following the collapse of the Terra stablecoin on Wednesday, selling pressure briefly forced the world's largest stablecoin — known as Tether — to fall below $1 early Thursday. It's the latest sign of pressure on the supposedly safe coins at the heart of the crypto economy.
Why it matters: While Tether reclaimed its $1 value, the disconnect has focused minds even more sharply on what seems like the growing fragility of the crypto markets in recent days.
Tether officials were able to calm what appeared to be the the equivalent of a bank run with public assurances that people can continue to easily redeem their holdings at the full $1 value.
Catch up fast: Earlier this week, TerraUSD (also known as UST), the world's fourth-largest stablecoin, suddenly collapsed from its dollar peg. And Luna, the cryptocurrency that was supposedly backstopping the coin — completely self-immolated, wiping out billions of paper wealth.
That the contagion then hit Tether — the world's largest stablecoin with a market cap of more than $80 billion — sent shockwaves through the world of crypto and, perhaps, beyond.
Around the same time Tether lost its tie to the U.S. dollar, prices for Bitcoin crashed sharply to $25,000 in overnight trading, though it also rebounded.
What we're watching: Whether the crypto contagion will make the jump out of the cryptoworld and into the reality-based financial system. There's a couple ways that could happen.
Tether works a bit like a money market mutual fund. It's coins are backed by collateral such as Treasuries and short-term corporate debt called commercial paper. If it's hit with waves of redemptions, it could be forced to sell off this collateral suddenly — roiling those markets.
A broad crypto collapse could expose financial ties to other non-crypto entities that have grown in recent years.
What they're saying: "Many regulated financial entities have have increased their exposure to cryptocurrencies, defi [decentralized finance] and other forms of digital finance in recent months," wrote analysts from Fitch Ratings. "There is also a risk of an impact on the real economy, for example through negative wealth effects if crypto asset values fall steeply."
The bottom line: In the world of finance, no one likes to admit something is a big problem, unless they absolutely must. But when price moves are massive, the truth comes out.