A collapse of Tether could be crypto’s ‘Lehman Brothers moment’ as the world’s top stablecoin begins to wobble and major tokens plummet, analyst says

• A collapse of the Tether stablecoin would be crypto’s “Lehman Brothers moment,” according to an analyst from GlobalBlock. 
• Following Terra’s collapse, the $81 billion Tether stablecoin began to deviate from its $1 peg.
• “I am optimistic that [Terra’s] fall would not be that catastrophic — a collapse of [Tether] would be though,” GlobalBlock said.

Crypto markets are getting roiled this week following the collapse of Luna and its related stablecoin, Terra, which deviated by more than 50% from its $1 peg this week.

The implosion of Terra has spread to other stablecoins in recent days, including Tether, which is the largest stablecoin based on its $81 billion market capitalization. Investors have long questioned what reserves Tether has to back up its $1 peg, and the stablecoin traded off as much as 5% to $0.95 early Thursday.

The destabilization of various stablecoins could represent crypto’s “Lehman Brothers moment” as investors begin to worry about the systemic risk ingrained in cryptocurrency markets.

During the 2008 Great Financial Crisis, Lehman Brothers went bankrupt due to its overexposure to bad credit, and around the same time money market funds broke the buck, or deviated from its dollar peg due to extreme investor sentiment. 

But crypto can avoid its “Lehman Brothers moment” as long as Tether doesn’t go down the same path as Terra, according to GlobalBlock analyst Marcus Sotiriou.

“Some have called this a ‘Lehman Brothers’ moment due to the contagion this may cause, however I am optimistic that UST’s [Terra’s] fall would not be that catastrophic — a collapse of USDT [Tether] would be though, and we have seen the largest stablecoin by market cap wobble over the past 24 hours,” Sotiriou said in a note to Insider.

But Sotiriou doesn’t see Tether actually going down the same path as Terra and significantly deviating from its $1 peg.

“Although USDT becoming de-pegged persistently is a risk worth noting, I am confident that the USDT peg will be restored as I think Tether has sufficient backing in their reserves, and its mechanics are safer than the UST stablecoin,” Sotiriou said.

But the implosion of Terra is likely to have a wide impact on the crypto market as so many projects and businesses were exposed to the stablecoin, including many funds, VCs, and market makers, “which may be forced to liquidate other positions,” Sotiriou said. 

Additionally, the crypto market has fallen by nearly $2 trillion since its peak in late November. That destruction of value could have a wide-ranging impact on markets and even the broader economy due to the wealth effect. That’s the idea that as individuals become wealthier based on the assets they own, they are more inclined to spend money and help stimulate the economy.

“There is $1.3 trillion tied up in virtual currencies, so any threats to this market have real-world wealth effects as well. We expect more aggressive US regulation on this front as a result,” DataTrek Research said in a Thursday note.