Reviewing the history of stablecoin crashes and analyzing the potential risks of USDT

Author: Splin Teron, Crypto KOL

Translation: Felix, BlockingNews

This article will explore the history of stablecoin collapses, discuss potential risks for USDT, and what a USDT collapse could mean for the crypto market.

TerraUSD (UST) Collapse

On May 9, 2022, a whale sold a large amount of UST, causing its price to drop below $1. Concerns about the stability of UST led to a massive withdrawal of funds from Anchor (a UST yield deposit service in the Terra ecosystem that had been stable at a 20% APY) as well as selling of UST, exacerbating the downward trend.

In response, LFG (LUNA Foundation Guard) utilized a $1.5 billion stabilization fund to support the price. Terraform Labs’ $1.5 billion stabilization fund was also utilized to stabilize the market.

Despite attempts at $2 billion and potential additional investments, the price continued to drop (rumors circulated that companies such as Jump and Alameda had again offered $2 billion to save UST). Due to congestion on the Terra (LUNA) network and a backlog of pending transactions, Binance suspended withdrawals of UST and LUNA, and Terraform Labs then attempted to recoup an additional $1 billion from investors.

Later, it was reported that Do Kwon had withdrawn $2.7 billion before the bankruptcy. In the latest news, the Supreme Court of Montenegro revoked bail and extended the detention period of Do Kwon until June 16. The court will review the termination grounds proposed by the High Court, and then make a decision on whether the defendant will be released on bail based on the advice of defense counsel. In addition, both the US and South Korea have requested the extradition of Do Kwon.

What conclusions can be drawn from this?

  • Avoid chasing high interest rates, as they may be part of a scam.
  • Diversify assets to prevent a total loss of capital.

Related Reading: UST and Luna are deeply involved in short-selling. What happened to Terra in the past few days?

USDC Unpegging Incident

Let’s analyze the USDC unpegging incident that occurred in March 2023. At the height of the panic, some exchanges’ Depeg reached -25%. These situations are worth studying because they may be valuable references in the future – history often repeats itself.

The initial news that caught people’s attention was the sudden collapse of Silicon Valley Bank (SVB), which had been an important part of the Silicon Valley financial landscape for many years.

But as soon as the news that Circle’s funds were stored in SVB came out, the USDC unpegging process began. This situation also had a negative impact on other stablecoins, as traders were worried about their financial situation, leading to a massive run on the market. But not including USDT.

The algorithmic stablecoin DAI was most significantly affected. The reason is that 48% of DAI is supported by USDC, so it has a direct correlation with its value.

Later, the Circle CEO brought some good news. He said that due to the joint bailout plan of the Federal Reserve, the Treasury Department, and the FDIC, 100% of SVB’s deposits were safe, and withdrawals would be open the day after the bank resumed operations. The market panic gradually dissipated, and the USDC price returned to near-normal levels.

What conclusions can be drawn from this?

  • It’s worth paying attention to and analyzing the news background, and a collapse won’t happen overnight.

Related reading: A Comprehensive Review of the USDC Unpegging Incident: The Crisis and Opportunities of the DeFi Ecosystem


Now let’s discuss USDT. According to the latest data, USDT dominates the stablecoin field with a market share of 64.978%.

Tether, the issuer of USDT stablecoin, reported a net income of $1.5 billion for Q1 2023, with excess reserves of $2.44 billion. In their latest announcement, Tether stated they will invest 15% of their monthly profits in BTC.

For a long time, the potential collapse of USDT has been a topic of discussion in the crypto community. Despite surviving the harsh bear market, traditional hedge funds remain convinced that the downfall of USDT is just a matter of time.

Opponents of USDT argue that Tether artificially inflates the cryptocurrency market, leading to increased speculation and giving users a false sense of value.

Supporters have refuted these points, but this has made investors more cautious when dealing with Tether.

Hedge funds have been shorting Tether for years, and now more institutional investors are considering taking similar action. This trend is driven by concerns about the financial condition and transparency of Tether. Fines from regulators for Tether’s unclear financial reporting have further fueled these suspicions.

Many have been eagerly awaiting the latest audit news. However, Tether is unable to provide this information. Because once it is released, the US government will immediately freeze bank funds holding Tether assets. Tether insists it is doing well, and executives have referred to many of the speculations about its financial condition as stress tests.

USDT’s decoupling has occurred in 2017 and in a few other instances, with a decoupling range of 5-10%, but the decoupling time was short.

In terms of market capitalization and being one of the most widely used assets, the collapse of USDT would have catastrophic consequences for the entire cryptocurrency industry. However, the best way for traders is to be prepared for any situation, stay up-to-date with the latest news, and respond accordingly.

Related reading: Digging into USDT and USDC terms of service: You may not have the right to redeem your stablecoins

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