Stablecoin tether breaks its peg and drops to $0.95 as panic hits crypto markets after collapse of TerraUSD

• Tether suffered its biggest drop in over a year as the stablecoin broke its peg and dropped as low as $0.945.
• Panic was spreading in the crypto markets Thursday after stablecoin TerraUSD hit a low of $0.30 and sister token luna plunged 98%.

Tether, the world's biggest stablecoin, tumbled as low as $0.94 on Thursday as panic spread across crypto markets after a dramatic plunge in the TerraUSD and luna tokens.

The stablecoin fell to $0.9455 early Thursday before rebounding to trade at $0.983 as of 4.48 a.m. ET.

It was the sharpest drop in tether — which has a market capitalization of around $80 billion — since March 2021, raising concerns about an asset that is central to the functioning of crypto markets.

The second-biggest stablecoin, USD Coin, held steady at $1 on Wednesday.

Stablecoins are cryptocurrencies that should be worth $1 at all times. They're widely used by crypto traders as a supposedly steady and less volatile place to park their cash.

But the dramatic fall in TerraUSD, the third-biggest stablecoin, to as low as $0.30 on Wednesday has sent shivers across the crypto market.

TerraUSD's sister cryptocurrency luna, which is free floating, has crashed around 98% in the last two days.

"Stablecoins' volatility is a new reality for the crypto market," said Alex Kuptsikevich, senior market analyst at trading platform FxPro. "Previously, investors preferred to park capital in stable currencies."

The "entire crypto market is crumbling like a house of cards," Kuptsikevich said, with bitcoin down around 10%, and ethereum and binance coin down roughly 19%.

Tether is a stablecoin that is backed by liquid assets, which should allow it to hold at $1 at all times.

But critics have long questioned whether the stablecoin has enough assets on hand to be able to handle a mass withdrawal by investors.

Analysts have said a run on tether could be a disaster for the crypto sector, given its importance to trading. A mass sale of tether's liquid assets, which include corporate bonds, could also trigger trouble in other markets.

Tether's management said in October that "all tether tokens are fully backed."

Paolo Ardoino, Tether's chief technical officer, said the token is honoring redemptions at $1 per token and that 300 million had been redeemed in the last 24 hours "without a sweat drop."

Read more: Algorithmic stablecoin UST has struggled to maintain its peg amid the crypto crash. We spoke to 6 crypto-investing heavyweights who are sounding the alarm on the project — and one who's making a bull case.