Tether Deal With New York State Brings Quick Reversal of Crypto-Market Sell-Off

The settlement appears to remove what might have been a systemic threat to cryptocurrency markets.

AccessTimeIconFeb 23, 2021 at 1:23 p.m. UTC
Updated Mar 6, 2023 at 3:17 p.m. UTC
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Bitcoin (BTC) and other cryptocurrencies recovered partially from their biggest sell-off in a month after the New York state Attorney General's office announced a settlement of a dispute involving the stablecoin tether (USDT) that had rattled market confidence in recent weeks.

Prices for bitcoin, the largest cryptocurrency by market value, jumped to $49,000 after the announcement, having hit lows below $45,000 earlier Tuesday. As recently as Sunday, bitcoin had pushed to a new record high above $58,000.

"After 2.5 years and 2.5M pages of info shared, we admit to no wrongdoing and will pay US$18.5M to resolve this matter," Bitfinex tweeted, adding that no finding states that Tether ever issued [the stablecoin] without backing or to impact crypto prices.

According to trader and analyst Alex Kruger, the settlement news is bullish for bitcoin, decentralized finance (DeFi) and Bitfinex's LEO token.

Analysts at JPMorgan warned last week that a sudden loss of confidence in tether – a stablecoin widely used to fund cryptocurrency purchases – would pose risk to the crypto market stability.

In April 2019, the New York prosecutors had accused Bitfinex of using Tether's funds to cover up the loss of $850 million in customer and corporate funds held by a payment processor.

Earlier Tuesday, bitcoin price had slumped to a 12-day low on Tuesday, extending Monday’s double-digit fall from record highs.

Despite bitcoin's increasing use by big investors as a hedge against inflation, many analysts in both crypto markets and on Wall Street say the cryptocurrency still trades like a risky asset, so it's vulnerable when the mood in traditional markets darkens.

And that's what happened on Monday, when stock markets came under pressure on Monday and the yield on 10-year U.S. Treasury notes reached a 10-month high of 1.39%, extending the year-to-date gain to over 35 basis points, or 0.35 percentage point.

The risk aversion likely helped drag bitcoin lower. 

According to CNBC, rising yields could signal investor expectations of reflation – an expansion in the level of output of an economy by using either fiscal or monetary policy or both, with a corresponding increase in prices for assets and consumer goods and services. The U.S. Federal Reserve has been trying to reflate the economy since the March 2020 crash and has pumped trillions of dollars into the system to achieve that goal.

Analysts expect Federal Reserve Chair Jerome Powell to tell Congress later Tuesday that the central bank is committed to keeping interest rates low. The U.S. central bank is also likely to continue with its liquidity-boosting bond purchase program, despite a recent rise in inflation expectations and an improving growth outlook. That will likely push bond yields lower and put a floor under both equities and bitcoin.

“The recent spike in yields suppressed some of the risk-on sentiment, which is inevitable so. But I suspect Powell will err to the side of caution and yields will be lower after his semiannual testimony.” Denis Vinokourov, head of research at the London-based prime brokerage Bequant, told CoinDesk. “In turn, [we’re] expecting risk flows to resume and support upside in BTC and with it the rest of the market.”

According to Margaret Yang, a strategist at DailyFX, investors are anticipating a large U.S. fiscal stimulus bill worth $1.9 trillion, which could boost the reflation theme and inflation outlook.

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