Stablecoin Turbulence and Market Collapse: When the Foundations Shake

Stablecoin Turbulence and Market Collapse: When the Foundations Shake

While Bitcoin and the entire crypto market are caught in a downward spiral, cracks are suddenly appearing in an area that should be considered stable: stablecoins. The USD1 token from World Liberty Financial (WLFI), the crypto project with direct ties to the Trump family, lost its dollar peg on Monday – an incident that raises questions about the robustness of the entire stablecoin ecosystem far beyond the immediate price movement. Combined with the ongoing market selloff, a picture of increasing instability in the crypto sector is emerging.

The Facts

World Liberty Financial's USD1 stablecoin slipped below its dollar peg on Monday, temporarily falling to $0.994, putting the price around 0.6 percent below the intended peg ^[2]. The WLFI team spoke of a "coordinated attack" and explained that attackers had hacked several accounts of WLFI co-founders, paid influencers to spread FUD (Fear, Uncertainty and Doubt), and opened massive short positions on WLFI to profit from the artificially generated chaos ^[2].

The stablecoin, issued in partnership with crypto custodian BitGo, has a market capitalization of around $5 billion and is backed by short-term U.S. Treasury bills, dollar deposits, and other cash equivalents ^[2]. A mint-and-redeem mechanism that allows token holders to exchange their coins for the equivalent value in U.S. dollars at any time prevented a larger collapse. USD1 was last trading at $0.999, only marginally below parity ^[2].

Parallel to the stablecoin turbulence, the selloff across the entire crypto market continues unabated. Bitcoin lost 3.3 percent on a daily basis and was trading at just under $63,000 – exactly 50 percent below its all-time high of $126,000 ^[1]. Ethereum stands at $1,800, even 63 percent below its previous peak ^[1]. Market sentiment is reflected in dramatic liquidation figures: in the past 24 hours, nearly 120,000 traders were liquidated, with total liquidation volume amounting to $381.68 million ^[1].

Investor nervousness is clearly visible in market indicators. Open interest in Bitcoin dropped significantly, while derivatives volume surged. The Fear & Greed Index fell into the "extreme fear" range ^[1]. Institutional investors are also pulling back: around $204 million flowed out of Bitcoin ETFs from BlackRock, Fidelity, and other providers on February 23 ^[1].

Triggers for the market collapse include developments in the U.S. regarding new tariffs. The U.S. government is planning national security reviews to legally secure additional tariffs after the Supreme Court overturned earlier emergency tariffs. President Donald Trump is threatening trading partners with higher duties and wants to rapidly rebuild his global tariff regime on a new legal foundation ^[1].

Analysis & Assessment

The parallel developments – the depegging of a politically connected stablecoin and the ongoing market selloff – reveal a dangerous mix. While stablecoins are supposed to function as a stabilizing anchor in the volatile crypto market, the USD1 incident shows that even these supposedly safe havens are vulnerable to manipulation attempts and loss of confidence. Particularly explosive: with a market capitalization of $5 billion, USD1 is not an insignificant player and ranks well above numerous other stablecoin projects, even if far behind the market leaders USDT and USDC.

The WLFI team's explanation of a "coordinated attack" may be partially accurate, but simultaneously raises questions about the project's resilience. The fact that hacked social media accounts, paid influencers, and short positions are sufficient to destabilize a stablecoin with several billion dollars in backing suggests structural weaknesses. The political connection to the Trump family makes USD1 a particularly attractive target for market manipulation – a risk factor that cannot be ignored when evaluating the project.

The broader market context amplifies concerns further. With Bitcoin 50 percent below its all-time high and Ethereum even 63 percent below, we are in a full-fledged bear market. The extreme fear among investors, massive liquidations, and ETF outflows signal a possible capitulation point. Historically, sustainable recoveries often emerge from such phases – but only if the fundamental structures remain intact. If stablecoins now also come under pressure, this could usher in a new dimension of crisis.

Macroeconomic factors, particularly U.S. tariff policy, also show that crypto markets do not exist in a vacuum. Uncertainty in global trade weighs on risk assets generally. Bitcoin has not yet established itself as a reliable "safe haven" and continues to behave like a risky asset during times of crisis. For long-term oriented investors, however, the current phase could offer accumulation opportunities – provided the fundamental infrastructure of the crypto ecosystem remains stable.

Conclusion

• The depegging of the Trump-linked stablecoin USD1 reveals vulnerabilities in the stablecoin ecosystem and shows that politically exposed projects are particularly susceptible to manipulation attempts

• The simultaneous market collapse with Bitcoin 50 percent below its all-time high, extreme fear indicators, and massive liquidations suggest a possible capitulation point – historically often a turning point

• The combination of unstable stablecoins and general market selloff could trigger a systemic crisis if confidence in the fundamental infrastructure continues to erode

• Macroeconomic factors such as U.S. tariff policy weigh on the entire crypto market and demonstrate that Bitcoin does not yet function as an independent safe haven

• Long-term oriented investors should closely monitor the structural integrity of the ecosystem – favorable entry prices are only relevant if the fundamental systems remain stable