These 2 Things Could Destroy Cryptos in September

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  • The crypto industry is precarious and it won't take a lot to further undermine investor confidence.
  • September will see further clarity on the potential shape of crypto regulation in the U.S.
  • A recent Wall Street Journal article raised more questions about Tether's reserves.

After nine months of investor pain, there could still be clouds on the horizon.

Crypto prices have been devastated this year, and many are down 90% on their all-time highs. A lot of that is because of wider issues and tighter economic policies around the world. However, the impact was magnified by a host of crypto-specific factors. For example, it turned out certain crypto lending platforms were taking huge risks with investor money in order to pay high returns. Sadly, this was only sustainable in the good times.

Perhaps the biggest lesson of 2022 for newer crypto investors is how precarious this industry is. It's one thing to read that these are high-risk investments, it's quite another to watch a well-known crypto ecosystem crumble before our eyes, wiping out billions of investor dollars.

Ultimately, after nine months of sub-optimal price action, the real question is whether there could be more bad news in store. Nobody knows for sure, but in addition to further economic woes, there are two big threats hanging over the industry: the shape of regulation and the uncertain foundations underpinning the industry's biggest stablecoin.

1. Increased regulation is coming

The threat of regulation is talked about so often that it has started to feel like a fictional boogeyman. But it is not a mythical figure -- increased regulation is coming, and when it does, it's going to have a big impact on crypto prices both long term and short term. September is an important month in this regard as it's when many responses to President Biden's Executive Order on crypto are due.

On March 9, the Executive Order gave various authorities 180 days to respond on key issues relating to crypto and blockchain in the U.S. Those reports won't be the final framework, but they will give us all a sense of what's in store. Pay particular attention to ideas around whether crypto exchanges will have to follow similar rules to stock brokers -- and whether cryptos might have to follow similar rules to equities.

Other areas to watch out for are the possibility the U.S. might create a digital dollar, and the steps it might take to control stablecoins. The initial response to Biden's Executive Order was relatively positive, but it's the details that matter and those will become clearer very soon. Proposals for heavy-handed controls could heap more woes on the already-struggling industry.

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2. Tether still may not be so tethered

Tether (USDT) is the biggest stablecoin in the industry, as well as being the third largest crypto by market capitalization. It plays a significant role in crypto and underpins huge swathes of crypto trading, though other stablecoins have taken some market share.

Stablecoins are a type of cryptocurrency that tie their value to another commodity, such as the U.S. dollar. Tether is supposed to have $1 in reserve for every USDT token it issues. That's how it maintains its peg. The issue is that it isn't very transparent about how it holds those reserve dollars. If there was a run on Tether and lots of people tried to sell their USDT, it isn't clear whether the money's there for them to do so.

Tether is no stranger to scrutiny about its reserves. The token is banned in New York after an investigation by the Attorney General. "Tether's claims that its virtual currency was fully backed by U.S. dollars at all times was a lie," said New York Attorney General Letitia James when announcing the ban and $18.5 million fine.

Various investigative journalists have tried to root out more details on where it keeps its funds. Most recently, the Wall Street Journal reported that a "0.3% fall in assets could render Tether technically insolvent." Tether labeled the article a "series of unsubstantiated conclusions." All the same, that thin margin for error means it won't take a lot of turbulence or investor uncertainty to unsettle the stablecoin giant.

Understand the risks

Crypto regulation may play out very slowly, and Tether may be able to hold on. But they are both huge clouds on the crypto horizon. Bitcoin (BTC) is hovering around the $20,000 mark and has already wiped out all of 2021's gains. Prices could still fall further, and investors need to be prepared. Only invest money you can afford to lose and don't assume that crypto has the same protections as stocks or money in the bank.

Unfortunately, it wouldn't take much to push us back to the types of prices we saw in 2019. And if prices start to fall, they can quickly spiral downwards, particularly if more crypto platforms fail. That's why a wobble on Tether's reserves or hints that regulation could be harsher than hoped could have an outsized impact on the whole industry.

An oft-used Warren Buffett quote springs to mind: "Only when the tide goes out do you discover who's been swimming naked." We learned a lot following the collapse of Terra's LUNA, but if the tide goes out even further, we may find a few more naked crypto swimmers.

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