The volatility of cryptocurrencies was again clearly felt by Bitcoin & Co. investors this year. But even those who bet on supposedly safer stablecoins were probably surprised by the latest developments on the market.
Last week, the relatively small cryptocurrency Titanium, which IRON Finance issues, took a massive tumble. Within a very short time, its value fell from over 60 US dollars to almost zero. For a arge number of investors, this meant a total loss and crypto bull and billionaire Mark Cuban was also affected by the flash crash on the crypto market.
“I got hit like everyone else. The crazy thing is I made it out, and I thought they would raise their TVL enough. Then Bam.”, the investor wrote on Twitter, referring to the Total Value Locked (TVL), which is defined as the total amount of money locked into a DeFi protocol, effectively equalling total liquidity.
As a result, the stablecoin IRON also collapsed. The connection is understandable: IRON, as a stablecoin, invested part of a collateral in Titanium and subsequently also lost massively in value.
The reappraisal was quick, just one day later, the cryptocurrency team released a statement titled “Post Mortem” to follow up on what happened. “We never thought it would happen, but it just did. We had just experienced the world’s first major crypto bank run,” the developers wrote in the aftermath of the events, calling it “the worst thing that could happen to the protocol”. They also explained why the Titanium crash hit the stablecoin IRON so hard: “Remember that Iron.finance is a partially collateralised stablecoin similar to fractional reserve banking in the modern world. If people panic and run to the bank to withdraw their money in a short period, the bank can and will collapse.”
Many observers speculate that the Titanium Coin was too overpriced, to which Mark Cuban himself may have contributed. For the billionaire expressed his enthusiasm for the crypto coin in a blog post just days before the crash, declaring: “As long as I get a good return, I’ll invest my money.”
After the crash, the investor referred to the events again and explained that the share of Titanium in his crypto portfolio had been small. But it was enough “that I was not happy about it”, he added. The billionaire then also criticised himself in an interview with Bloomberg. He had been too lazy to get behind the mathematics of the algorithmically backed stablecoin IRON.
In this context, he is in favour of stronger regulation, especially against the background that IRON is a decentralised coin: “If the collateralisation is not 1 to 1, should […] the risks for all users have to be clearly defined and approved before release?” he asks the portal.
The collapse of IRON in the context of the Titanium cryptocurrency crash raises questions about how safe stablecoin investors can feel with their investment. Stablecoins were developed to cushion the intense volatility in the crypto market. Price stability is achieved by backing stablecoins with assets outside the crypto universe – usually fiat money. Investors who invest in cryptos backed 1:1 by a fiat currency thus receive one stablecoin for one dollar, for example. This can be exchanged for the equivalent value of the fiat currency at any time. Against this background, stablecoins that are backed by currencies (or commodities such as gold) are suitable for parking money. Probably the best-known stablecoin is Tether, a currency pegged 1:1 to the US dollar. Behind Bitcoin and Ethereum, Tether is the third-largest cryptocurrency worldwide by market capitalisation.
However, IRON is not a stablecoin backed 1:1 by fiat currency; instead, part of the token is backed by cryptocurrencies – in this specific case, the digital currency Titanium. IRON investors have thus accepted the risk of the cryptocurrency when investing.
Among many investors, fiat-backed stablecoins are considered a relatively safe option to participate in the crypto market without being exposed to too much volatility risk. But in the past, this supposed security has already proven to be deceptive. For example, in February of this year, Tether reached an agreement with the New York public prosecutor’s office to pay a fine of 18.5 million US dollars. The issuing company had been accused of creating dollar tokens without complete backing by fiat currency. Although the Tether issuers always denied the accusations, they nevertheless paid the fines to be able to put the allegations to rest. Many cryptocurrency participants continue to distrust Tether and see Tether as a ticking time bomb in the digital assets space.
Stablecoins that are not fully pegged to fiat currencies are inherently riskier, depending on which asset they are pegged to – and this is what IRON investors felt recently. As implied by the name, 100 per cent security or stability cannot be expected from any stablecoin, and investors must be aware of this. Moreover, unlike Mark Cuban recently, one should take a close look at the composition and background of a stablecoin before “parking money”.