How USDC Stablecoin Depegging May Break Many Crypto Firms, But Bitcoin Will Be Stronger
The USDC stablecoin depegs at an alarming rate, falling to as low as $0.89, far from the $1 peg.
Volatility is expected to continue through the weekend as panic sets in following the Silicon Valley Bank collapse.
SVB’s failure hurts the reserve position of USDC, which is issued by Circle.
Members of the consortium behind the USDC stablecoin include Coinbase, the largest exchange in the United States. Coinbase could see its share price come under pressure when markets open on Monday.
In a tweet last night, Circle disclosed that USDC holds a quarter of its reserves in cash with 7 bank partners, including Silvergate and SVB. USDC has 3.3 billion dollars tied to SVB.
The rest of the USDC’s reserves are in short-dated US Treasury funds held at BNY Mellon Bank.
Unfortunately for many USDC depositors – who are mostly tech startups and VCs – the vast majority of their funds are not insured by the Federal Deposit Insurance Association (FDIC), as the guarantee only covers the first $250,000.
The California Department of Financial Protection and Innovation took control of SVB — making the FDIC receiver — after depositors started a run on the bank by trying to withdraw as much as $45 billion on Thursday.
USDC is the second largest stablecoin in the crypto ecosystem and is an important part of the industry’s plumbing.
How was SVB closed down – which banks could be next?
The problem began for SVB when they were forced to sell their long-dated US government bonds at a loss.
SVB had used customer deposits to buy long-dated US Treasuries which they intended to hold to maturity for a small but reliable return. This is common practice in the fractional banking model that underpins modern banking.
But in order to meet demands for deposit withdrawals, SVB had to sell these bonds at a loss. The Fed raising interest rates means that the value of bonds falls, because bond yields and prices have an inverse relationship.
This meant that SVB’s assets were worth less than they bought them for. It ended up with a loss of $1.8 billion.
Again, in normal times these will not be a problem as the bonds will be held to maturity, but if a foreclosure takes place, the unrealized losses are realized.
To cover these losses, and future expected losses, SVB decided to issue equity capital.
That’s when the alarm bells started ringing among the depositor base.
SVB has a total of USD 175.4 billion in deposits, of which USD 151 billion is uninsured, and makes up 85% of deposits.
Peter Thiel’s Founders Fund advised depositors to get out, which was the nail in the coffin for SVB – bank runs are hard to stop.
Weaknesses in the banking system make the case for bitcoin as a store of value
Worryingly for the banking system, SVB is not alone in having this type of unrealized loss on its balance sheet, as the chart from the FDIC shows below:
Other banks may now become a target for short sellers and their depositors may start to get nervous.
California-based First Republic Bank, which caters to an affluent customer base, saw its shares fall as much as 15% on Friday. Other regional banks have also come under pressure.
The fragility of the banking system may not extend to the well-capitalized big banks, but the regulator may have taken its eye off the ball when it comes to the smaller institutions, as seen with Silvergate and SVB.
While this may be hard to appreciate right now, the unfolding drama actually highlights the solid use of bitcoin as a store of value.
Perhaps that’s why the price of bitcoin hasn’t cratered on news of the Silicon Valley Bank failure, although that may be because the Silvergate news used to be enough to get the sellers out.
Nevertheless, the bitcoin price in the last 24 hours has held up well, but market participants can expect more volatility going forward.
Bitcoin has rallied 64% from the bottom in the short term and has only pulled back 20% so far.
At this point, traders could be forgiven for thinking that bitcoin is a more stable coin than USDC.
Bitcoin holders will also be comforted by the fact that it has a large area of support at the volume profile’s control line (red line) around the $16,000 levels.
USDC and DAI in trouble – which of the best stablecoins are at risk?
Traders and crypto firms reacted to the news of USDC reserve exposure to SVB by exiting their stablecoin positions and moving into Tether (USDT).
USDT is the original stablecoin, but has never had a full audit of its reserves, but is now seen as safer than USDC.
As a result of the buying pressure, Tether has now moved off the peg in a positive direction, valued at $1.01.
Other stablecoin issuers have been quick to post statements that they have no SVB exposure, including Paxos issuer Gemini, BUSD issuer Binance.
Tether CTO Paolo Ardoino published a statement saying USDT has no SVB exposure.
The implosion of the USDC has major ramifications in the crypto space that could turn the crypto winter into an ice age crisis.
Decentralized exchange Curve has seen the 3Pool stablecoin pool go wildly out of balance. DAI, USDC and USDT are held in roughly equal proportions – but that’s in normal times.
Now only around 6% is in USDT while USDC and DAI each make up more than 40% of the pool.
DAI is heavily secured by the USDC and is also being depegged as of now – currently changing hands for $0.90 instead of $1. DAI is the fourth largest stablecoin.
Ethereum gas fees are increasing
Another direct consequence of the latest twist in the crypto crisis is Ethereum gas fees rising to 300+ Gwei.
That equates to transaction costs on the Ethereum blockchain that at one point forced Uniswap users to pay an average of $90 to move funds.
At the time of writing, the average Gwei is 83, but could rise again when the US Saturday session opens.
The Ethereum chain is congested as various crypto firms attempt to reposition their funds to protect themselves from SVB contagion.
Gosh! A trader paid $2 million to receive $0.05 USDT
Such is the level of disorder in the market, a trader who bet on a pool of liquidity tried to get out, but did not set his slide – similar to placing a limit order in stocks.
As a result, the trader fell victim to a so-called maximum recoverable value penalty. The transaction ended up costing $2,080,468.85 to receive $0.05 USDT:
Buy USDC today and you can make a lot of money – you can also lose it all
For those who are not afraid of high-octane risks, there can be large sums to be made.
Arbitrageurs could buy USDC in its depegged state and then redeem it for $1 on Monday, pocketing the difference.
But of course it is incredibly risky because no one knows what the FDIC will do with the uninsured deposits at SVB, of which the USDC reserves to pay redemptions are a part.
Some would argue that the taxpayer should have nothing to do with bailing out a bank that went all-in on building a deposit base that lacked diversity, due to its predominance of tech startups and VC investment.
Michael Egorov, founder of Curve Finance, said in comments to Bloomberg that everything will be fine, but he would say that wouldn’t he?
“I think we’ll see a lot of volatility in the USDC price over the weekend because USDC redemptions won’t work during that time – banks don’t work on weekends,”
He then optimistically added: “But the situation may improve when the redemption kicks in on Monday and some traders will buy cheap USDC and redeem 1:1 to USD.”
Who buys SVB? Elon Musk?
On Monday, market participants will see how the FDIC intends to deal with the problem of the uninsured deposits. Ket until it will be if a buyer for the bank can be found.
However, large banks may be wary of becoming entangled in SVB at a time of great uncertainty.
Elon Musk perhaps playfully hinted that he might be interested in buying the bank.
But Musk has a habit of not following through on his tweeted statements.
