No, USDC is Not Going to 0
Ever since the collapse of LUNA and UST, it seems like everyone - in the crypto industry, especially - is living right on the edge of their seat. In this worldwide game of musical chairs, nobody is trying to be caught with nowhere to sit.
At the first sign of trouble or potential insolvency, people liquidate everything and then post panic memes on Twitter. "Steady lads" has become one of the #1 memes in the cryptoverse.
ICYMI, Silicon Valley Bank went under this past week (this is my post from yesterday about what happened, if you're curious). They are - or were - the 16th largest bank in the U.S. and primarily serviced Venture Capitalists, Startups and as we recently found out, Crypto companies like Circle.
So SVB went under and then news broke pretty soon after that Circle held some "undisclosed amount of up to $9b" that backs the USDC:USD Peg in an account at SVB.
It took a few hours for Circle to respond and in the meantime, people started dumping USDC and heading for the hills, worried that USDC would be insolvent because of this crisis:
So we found out that $3.3 Billion of the total $40B in $$ that backs the USDC peg are held at SVB and currently cannot be withdrawn. Yeah, that ain't great - roughly 8% of USDC reserves cannot be accessed at the moment.
FDIC Recovery Process
SVB was the 16th largest bank in the U.S. and most people are wrong about how the federal government operates in an environment like this. Remember 2008? Sure, the environment isn't the same but the actions the government is pressured to take are very similar: the government bails banks out and finds ways to protect depositors.
Afterall, if the government doesn't step in to protect the banks, then what would happen to this country? Shit would hit the fan real quick. In my opinion, SVB is going to get acquired by a much larger bank and subsidies are going to be paid out to cover the debts. I won't be surprised if - come Monday morning - we hear that SVB is acquired by something like JP Morgan Chase and a Government Subsidy ensues.
This would mean that all customers at SVB would immediately get bank accounts at Chase. Trust me, Chase has the funds to cover all these deposits.
In the FDIC recovery process - using prior cases as a lens - we can give a "better case scenario" rather than just a worse case scenario.
So worse case scenario, 8% of reserves went poof. That puts USDC at $0.92 in actual pegged value.
More likely case scenario, Circle will recover the majority of the $3.3B and actually only lose $198M. Now, Circle holds more than 75% of their assets in short-dated US treasuries with a maturity date of 3 years or less. This means that the $198M would be recovered by just a few months worth of interest payments.
Why is USDC Down 8%?
A stablecoin should not be less than $1.. Well, most of the time. USDC crashed 8% because of sheer panic. That's how bank runs work. That's actually how SVB went under.
SVB would have most likely been fine too but when a bank run happens and most of the capital is tied up in long-term yield treasuries, shit can hit the fan real quick.
I don't think USDC is going anywhere but I do think the market is overreacting. As I outlined above, we know exactly what exposure USDC (Circle) had to SVB - $3.3 Billion.
We also know that it's relatively likely that they'll recover a material % of that $3.3B. Even if they don't, that's an 8% gap in the treasury reserves. People are acting like it's an 80% gap and USDC is going to 0 tomorrow.
Coinbase stopped USDC:USD redemption because its the weekend (normal operating procedures each weekend).
USDC has relatively low liquidity on exchanges and that's currently where everyone is going to dump their USDC because there's no ability to redeem.
Binance closed BUSD:USDC conversions and has been phasing out USDC to attempt to gain market dominance for BUSD for a while now.
The Market Overreacts
The market almost always overreacts. We're seeing this happen right now. Remember that Circle has a lot more options than you think to cover this.
- Issue debt for the missing $3.3B and then make up for it over time with interest returns on the other $30+ Billion
- SVB gets bailed out and Circle loses nothing
My opinion - NFA, make your own decisions - is that USDC is not going anywhere. I tend to doubt the big crowd plays and yes, bank runs can put even good businesses out of business... HOWEVER, we know the exposure here. We know that it's 8% of the reserves.
That means that the worst has already happened. USDC dumped to $0.92 which would be fair market value even if the whole $3.3b is lost forever. In a few months time, USDC will start to recover that $3.3b through their interest payments on short-dated treasuries anyways.
We also know that its the weekend and redemption arbitrage can only take place Mon-Fri. I think that come Monday morning, USDC will bounce right back to the peg and it will be business as usual.
I also think that on Monday, we'll get some clarity about SVB and what happens next. You know my prediction, let's see what plays out.
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I think it went as low as $0.87 and bounced back already. I agree that the exposure to SVB was only a small fraction of the reserves so there is a good chance that USDC will go back to normal in no time.
Once the dust settles, we move on to the next collapse. 😂
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We never seem to catch a break lol.
your post is very clear, thank you for giving us this information. I have to admit that actually after the collapse of TERRA/LUNA I too am much more afraid when similar things happen like the depeg of a stablecoin
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Just waiting 🧘🧘
It's good to read a different perspective on the matter. It helps balance out the hemispheres of the brain :)
In the mean time, buy up cheap usdc and wait for the peg to recovers = profit
I think a worse scenario is:
This could see USDC bounce back to close to parity Monday morning before falling again later.
While that hole remains there will always be sell pressure. And (as far as I can see) no way to mint new USDC. Their model doesn't work unless its fully backed.
My guess is they announce tomorrow / Monday how they are going to fill the hole. It's not a huge amount. Probably 2 bn after the advance dividend from SVB. Capital raise / loan / securitisation etc.
"In such a case, Circle, as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary."
thanks for the confirmation as the rumour spreading rapidly.
I agree that $USDC isn't going to $0, not yet at least. As long as the remaining 92% is outside the control of the toxic banks, it'll survive. But, if there's no way to redeem it, we could see a massive dump come Monday morning, we'll just have to wait and see.
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That LUNA-UST was really something ... literaly started a whole lot of shit
Nice informative post. I didn't really know what was going on behind the dump, but I bought some HIVE at lowest price yesterday and I'm happy, because I know it will bounce back.
Agreed we should not get panic they will definitely find a way to get out of this difficult situation
Ironically when users dump USDC at an 8% loss Circle makes a ton of money because their arbitrage bot can buy up tokens at a discount. Of course that bot perhaps already ran out of money which is why the price depegged so hard in the first place, but there's always a chance the algorithm they use plays it a little safer than that.
The alarming part of this dilemma for me was the fact that it has broken its peg, considering USDC is one of the most trusted, if not the most.
Will Tether be next?
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