Bitcoin & Co. investors once again felt the volatility of cryptocurrencies this year. But even those who rely on supposedly safer stablecoins have probably been surprised by the latest developments on the market.
• Titanium token crashed
• Apparently “bank run”
• IRON stablecoin affected
Stablecoins as a safe haven in the crypto universe? Investors who have bet on this should at least have doubts about this narrative after the recent events.
Titanium token drops to zero
Because last week the relatively small crypto currency Titanium, which is issued by IRON Finance, collapsed massively. Within a very short time, their value fell from over 60 US dollars to almost zero. For many investors, this meant a total loss, and the crypto bull and billionaire Mark Cuban was also affected by the crash on the crypto market.
“I was hit like everyone else. The crazy thing is that I made it out, thought they would raise their TVL enough. Then Bam.”, The investor writes on Twitter , referring to the Total Value Locked (TVL), which is defined as the total amount of the funds included in a DeFi protocol and thus corresponds to the total liquidity.
I got hit like everyone else. Crazy part is I got out, thought they were increasing their TVL enough. Than Bam.
— Mark Cuban (@mcuban) June 16, 2021
Stablecoin IRON also collapses
As a result, the stablecoin IRON also collapsed significantly. The connection is understandable: As a stablecoin, IRON has invested part of a collateral in titanium and subsequently also lost massively in value.
The processing was quick, just one day later the team around the crypto currency published a statement entitled “Post Mortem” in which the events should be followed up. “We never thought it would happen, but it just happened. We have just experienced the world’s first major crypto bank run,” wrote the developers after the events, describing them as “the worst that could happen to the protocol “. In this context they also explained again why the Titanium crash hit the stablecoin IRON so hard: “Remember that Iron.finance is a partially secured stablecoin, which is similar to the minimum reserve banking of the modern world. When people panic and quickly Time to run to the bank to withdraw your money
Many observers assume that the Titanium coin was overpriced, which Mark Cuban himself may have contributed to. Because just a few days before the crash, the billionaire was enthusiastic about crypto coin in a blog post and declared: “As long as I get a good return , I’ll invest my money.”
After the crash, the investor referred to the events again and stated that the amount of titanium in his crypto depot was small. But it was enough “that I wasn’t happy about it,” he added. The billionaire then also self-criticised “Bloomberg”. He himself was too lazy to get behind the mathematics of the algorithmically backed stablecoin IRON.
In this context, he is in favour of stronger regulation, especially in view of the fact that IRON is a decentralised coin: “If the collateral is not 1 to 1, […] the risks for all users should be clearly defined and before the release need to be approved? “he asks the portal.
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How safe are stablecoins really?
The slump in IRON in connection with the crash of the cryptocurrency Titanium raises questions about how safe stablecoin investors can feel with their investments. Stablecoins were developed to cushion the strong volatility in the crypto market. The goal of price stability is achieved by collateralising stablecoins with assets outside the crypto universe – usually with fiat money. Investors who invest in cryptos secured 1: 1 with a fiat currency receive one stablecoin for one dollar, for example. This can be exchanged for the equivalent of the fiat currency at any time. Stablecoins generated by currencies (or raw materials such as gold) are secured against this background to park the money. Probably the best-known stablecoin is tether, a currency linked 1: 1 to the US dollar. Behind Bitcoin and Ethereum , Tether is the third largest cryptocurrency worldwide in terms of market capitalization.
However, IRON is not a stablecoin that is 1: 1 secured by Fiat currency; instead, part of the token is secured with cryptocurrencies – in this specific case with the digital currency Titanium. IRON investors have therefore accepted the risk of the cryptocurrency when investing.
Many investors consider fiat-backed stablecoins to be a relatively safe option for participating in the crypto market without being exposed to excessive volatility risks. But in the past, the supposed security has already proven to be deceptive. In February of this year, the top dog Tether agreed with the New York prosecutor to pay a fine of 18.5 million US dollars. The publishing company was accused of creating dollar tokens without full fiat currency coverage. Although the Tether editors always denied the allegations, they still paid the fines in order to be able to shelve the allegations.
Stablecoins that are not completely linked to fiat currencies are per se riskier, depending on which asset they are made dependent on. This is exactly what IRON investors recently felt. One hundred percent security or stability, as the name implies, is not to be expected with any type of stablecoins, investors must be aware of this. In addition, unlike Mark Cuban recently, one should take a closer look at the composition and background of a stablecoin.