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Bitcoin-driven Crypto Rally Unabated

cryptocurrncy oct13 lt

The rally of cryptocurrencies, driven by Bitcoin is continuing unabated with Bitcoin touching a fresh 5-month high of $58,478.74. It is currently trading at $57,883.28, a gain of 5.5 percent in 24 hours and 6.8 percent in the past week.

Within a week it has surged 6.3 percent closer to its all-time high of $64,863.10 touched in April. Its market capitalization has increased by 7.9 percent to $1.09 trillion from $1.01 trillion, a week ago. Crypto market capitalization sans Bitcoin recorded a 1.6 percent increase to $1.31 trillion from $1.29 trillion in a week.

Ethereum, the lead alternate coin is currently trading at $3,730.45, a 8.1 percent rise in 24 hours and 4.5 percent gain in the past week.

Bitcoin's annual yield of 400 percent contrasts sharply with the 94 percent gains in brent crude oil, 21 percent rally in Dow Jones Industrial Average, and the 5.7 percent negative returns in gold.

Based on market capitalization as per coinmarketcap.com, the top-15 coins at press-time are Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Cardano (ADA), XRP (XRP), Solana (SOL), Polkadot (DOT), Dogecoin (DOGE), Terra (LUNA), Avalanche (AVAX), Litecoin (LTC), Bitcoin Cash (BCH), Algorand (ALGO), Stellar (XLM) and Polygon (MATIC).

Compared to our previous review, Binance Coin (BNB) and Stellar (XLM) advanced a notch each whereas Cardano (ADA) and Polygon (MATIC) declined one rank each.

Of late, regulatory concerns surrounding stablecoins have become louder, warranting a deeper drilling into the space for the sake of contemporariness. Simply put, stablecoins are cryptocurrencies or digital assets built on the blockchain, designed to rule out price volatility. These may be fiat-collateralized, crypto-collateralized and even non-collateralized or algorithmic.

Stablecoins are designed to maintain a price peg at a designated price, most often $1. In order to maintain its use and legitimacy, these are backed or collateralized by fiat cash, cryptocurrency or on-chain tokens that it can be redeemed/swapped against. The collateral backing is intended to ensure that holders of the token can redeem the tokens for U.S. dollars or other assets which can then be used in the real world.

Collateral committed to the stablecoins can vary between cash, commercial papers, bonds and more. Collateralized stablecoins may also require over-collateralization so that the fluctuations in value of the collateral can be absorbed. Some stable coins are non-collateralized and use algorithmic mechanisms of buying and selling the reference asset or its derivatives to maintain the peg.

The top 5 stablecoin tokens ranked according to market capitalization are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and TerraUSD (USDT). The current rankings are consistent with our previous review a few days ago.

Tether (USDT) is a stablecoin pinned to the US Dollar. USD Coin (USDC) and Binance USD (BUSD), too are USD backed stable coins. These three stablecoins also top the list of asset-backed stablecoins as per market capitalization. Though the price of Dai (DAI), is also soft-pegged to the U.S. dollar it is collateralized by a mix of other cryptocurrencies that are deposited into smart-contract vaults every time new DAI is minted. TerraUSD (UST) that is also value-pegged to the US Dollar is the decentralized and algorithmic stablecoin of the Terra blockchain.

Despite the growing concerns about its asset backing, Tether's (USDT) market capitalization increased to $68.81 billion from $68.43 billion a week ago. USD Coin's (USDC) market cap dipped to $32.80 billion from $33.23 billion and Binance USD's (BUSD) market cap declined to $12.98 billion from $13.18 billion during the same period. Dai (DAI) market cap continued at $6.48 billion whereas TerraUSD (USDT) was consistent at $2.73 billion.

Top tokens (excluding the stablecoins mentioned above) based on market capitalization now are Uniswap (UNI), Chainlink (LINK), Wrapped Bitcoin (WBTC), SHIBA INU (SHIB) and Axie Infinity (AXS). The rankings remain the same as in our previous review.

Meanwhile in its Global Financial Stability Report for the month of October 2021, the International Monetary fund (IMF) laid bare its concerns on the financial stability challenges by the crypto ecosystem. While acknowledging that the financial stability risks were not yet systemic, the agency opined that the risks need to be closely monitored given the global implications and the inadequate operational and regulatory frameworks in most jurisdictions.

The financial stability challenges from the crypto ecosystem are in general attributed to operational risks, cyber security risks, governance risks, challenges to anti-money laundering and combating of financing of terrorism (AML/CFT) initiatives, limited global standards, difficulties in cross border regulations, concentration risks, lack of reliable data as well as the anonymity of crypto assets.

In particular, the report raises concerns over the stability of stablecoins in the context of the credit quality and liquidity of its collateral backing as well as its price stabilization mechanism.

The report is categorical in stating that stablecoins require regulations proportionate to their risk and the economic functions they serve. Regulations are suggested inter alia on governance, risk management, disclosure requirements, independent audit of reserves, redemption rights, cyber resilience as well as fit and proper rules for network administrators and issuers.

As the IMF report rightly acknowledges, the crypto ecosystem offers an exciting new world of opportunities but also challenges. Concerns flagged by various regulators and policy makers seek to ensure that the risks to the financial system at large and to individual investors are minimized. Crypto world has indeed grown immensely and "let the buyer beware" can no longer be the maxim.

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