Bitcoin fell as low as $25,402.04 Thursday, down 10% from its 5 p.m. ET level Wednesday, its lowest level since December 2020, before rebounding to about $29,300, according to CoinDesk. Bitcoin had fallen the last seven consecutive days through Wednesday—its longest losing streak since March 2020, according to Dow Jones Market Data. Ether had also fallen 4.8% from Wednesday evening to trade at $1,933.85 Thursday—its lowest level since July 2021.

Cryptocurrencies have come under pressure in recent days alongside stock markets. Digital assets are increasingly moving in lockstep with equities as traditional money managers such as hedge funds and family offices have entered the space during the last two years, analysts say. Such funds may be more likely to sell crypto holdings during periods of volatility rather than hold them. 

Stocks staggered Wednesday as inflation proved to be stickier than economists had anticipated, heightening concerns about how much the Federal Reserve may have to further tighten financial conditions to curb inflation. Investors are worried that aggressive interest-rate increases could weigh on growth, already a concern with Covid-19 lockdowns in some Chinese cities and the war in Ukraine. 

Crypto has also been hit by a de-pegging of what was formerly the third-largest stablecoin by market value. Billed as being the least volatile part of the crypto universe, these assets are pegged to the value of government-issued currencies. Stablecoin TerraUSD has decoupled from its $1 peg in recent days, hitting 61 cents at 8:20 a.m. ET Thursday.

Its sister token, Luna, traded at 3 cents, down 99% from the previous 24 hours. The fall puts its value below that of joke cryptocurrency dogecoin, which traded at about 8 cents at the same time.

While the most popular stablecoins maintain their levels with assets that include dollar-denominated debt and cash, TerraUSD is what is known as an algorithmic stablecoin, which relies on financial engineering to maintain its link to the dollar.

In the past, TerraUSD kept its $1 price by relying on traders who acted as its backstop. When it fell below the peg, traders would burn the stablecoin—removing it from circulation—by exchanging TerraUSD for $1 worth of new units of Luna. That action reduced the supply of TerraUSD and raised its price.

Conversely, when TerraUSD’s value rose above $1, traders could burn Luna and create new TerraUSD, thus increasing the supply of the stablecoin and lowering its price back toward $1.

This system ceased to stabilize the cryptocurrency after a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors. At the same time, TerraUSD was also sold for other stablecoins through various liquidity pools that contribute to the stability of the peg. The sudden rush of selling spooked some traders, who intensified the rout. 

The break in TerraUSD has also caused concerns that other stablecoins could break from their typical levels. Tether, the largest stablecoin by market value, fell as low as 96 cents around 3:15 a.m. ET before rebounding to 99.3 cents at 8:20 a.m., according to CoinDesk data. Some hedge funds have intensified bets that tether could break from its $1 level in recent days, investors say. 

Regulators have in the past scrutinized the stablecoin, which parent company Tether Holdings Ltd. says is backed by reserves of cash or other financial instruments, as being too opaque. 

It took a yearslong investigation by New York’s attorney general, and an eventual $18.5 million settlement of accusations that Tether misled clients, for Tether to reveal what it holds in only broad terms each quarter through its accounting firm. Those holdings have consisted of investments like cash and short-term U.S. government securities but also short-term IOUs known as commercial paper. 

Tether hasn’t disclosed which companies holdings of commercial paper came from, leading to some investor concern about the quality and stability of those firms. Tether has previously said that it has consciously reduced its commercial-paper holdings since its settlement with New York’s attorney general.

“Tether is the most liquid stablecoin in the market and is 100% backed by a strong, conservative, and liquid reserve portfolio. Tether has withstood multiple ‘black swan’ events in cryptocurrency,” a spokesperson for Tether said, adding that the company has continued to process redemptions normally amid the current cryptocurrency selloff. 

Treasury Secretary

Janet Yellen

on Tuesday reiterated calls for Congress to authorize regulation of so-called stablecoins.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com