Tether stablecoin loses its dollar peg as contagion from FTX's collapse spreads through the crypto market

• Tether briefly lost its dollar peg on Thursday after the implosion of FTX shook the confidence of the entire crypto market.
• Tether is the third largest cryptocurrency with a current market value of about $70 billion.
• The stablecoin fell to a low of $0.98 Thursday morning before recovering most of its losses.

Tether lost its dollar peg on Thursday after the ongoing implosion of Sam Bankman-Fried's FTX shook confidence in the entire cryptocurrency market.

The development is unsettling because it adds to concerns of contagion spreading throughout the crypto market as trust declines considerably. For example, bitcoin has seen volatile trades, falling more than 20% to below $16,000 earlier as a cascade of margin calls threatens to unwind much of the leverage seen in crypto markets. It's now back above $17,000.

Tether, which is the third largest cryptocurrency and the world's largest stablecoin, fell to a low of $0.98 in Thursday morning trades before it recovered most of those losses.

The stablecoin has a market value of just under $70 billion, which is down 16% from its peak of about $83 billion. The decline has come amid an ongoing bear market in cryptocurrencies, and as concerns grew about the balance sheet holdings of Tether following the collapse of stablecoin TerraUSD in May.

But while the leaders behind Tether have repeatedly reassured investors that their stablecoin is indeed backed by reserves at a one-to-one exchange ratio, they have continued to push back the timeline on being independently audited.

Responding to the downfall of FTX, Tether co-founder William Quigley told CNBC on Wednesday that crypto exchanges and currencies shouldn't lever up highly volatile assets with debt.

"Everyone thought that the major exchanges were not susceptible to any kind of serious meltdown. And once again, we keep going back to whether it's 3AC, or Voyager, or Celsius or Luna, and it's the matter of debt. Debt is toxic with crypto," Quigley said.

"And it just violates a basic principle of finance; you don't lever up highly volatile assets," he continued. "When Wall Street came into this market last year big time … I think one of things they dragged in was their fascination with leverage," he later added.

The CTO of Tether, Paolo Ardoino, tweeted on Thursday that the stablecoin processed about $700 million in redemptions over the past day with no problems. "No issues. We keep going," he said.

In a Wednesday blog post, Tether once again reassured its holders that it has almost $70 billion of collateral that can back redemptions. But until an independent audit is conducted, it's likely that suspicions will continue, leaving the possibility for the stablecoin to break its peg again.