Below is a guest post by Andy Lian.
The cryptocurrency industry is currently experiencing anxiety due to concerns over the possible decoupling of USDC, a USD-backed stablecoin. As an individual who closely monitors the markets, I am observing the situation and would like to share some personal observations.
First, it’s worth highlighting that Silicon Valley Bank (SVB), which is responsible for holding the funds backing USDC, reportedly has enough assets to satisfy all withdrawal requests. According to a Federal Deposit Insurance Corporation (FDIC) report as of December 31, 2022, SVB had approximately $209 billion in assets and approximately $175.4 billion in deposits. However, despite its impressive asset base, there are still concerns about the liquidity of SVB’s books and the rate of expected haircuts should the bank suffer material losses.
This uncertainty stems from the fact that the underlying assets of banks are not transparent, and there is no clear indication of how illiquid or risky these assets are. There is a risk that banks will struggle to meet all of their obligations and the USDC peg may decrease if there is a material loss or liquidity decline. As USDC is widely used as a trading pair on various exchanges, this will have a significant impact on the broader crypto market.
Second, another important aspect to consider when it comes to USDC stability is the financial backing provided by Circle, a company that issues stablecoins. Circle holds 77% of its reserves in highly liquid instruments such as 1-4 month T-Bills managed by Blackrock and held at BNY Mellon. This reserve allocation provides USDC with great security as T-Bills are generally considered a very safe and liquid investment.
Circle-held T-Bills provide an absolute floor of about 0.77 for USDC. This means that USDC should not drop below this level even in the worst case scenario. Additionally, T-Bills are highly liquid and should be easy to sell if Circle needs to raise funds quickly to meet unexpected debt.
This provides additional protection to USDC and helps mitigate potential risks associated with stablecoins. In addition, Circle’s retained earnings and interest income should, in theory, be sufficient to cover any anticipated “losses” that may arise from the SVB. This means that even if SVB suffers significant losses or becomes illiquid, Circle should be able to cover potential losses without impacting USDC’s stability.
Third, another point to consider when assessing the potential impact of USDC’s depeg is Circle’s maximum exposure. The company will issue stablecoins to Silicon Valley Bank (SVB), the bank that holds the funds backing USDC. Experts estimate Circle’s maximum exposure to his SVB to be around $198 million.
While this may seem like a lot, keep in mind that Circle has substantial financial reserves and should be able to absorb potential losses without significant impact on USDC stability. is important. The entire crypto market has grown significantly over the past few years, with a current market capitalization of he over $2 trillion. In this situation, a potential loss of $198 million represents a relatively small percentage of the total market. It should not significantly affect investor confidence or the stability of the crypto market as a whole.
The fourth is the relationship between Coinbase and Circle. Another factor that puts USDC investors at ease is the relationship between Coinbase and Circle. Coinbase, one of the world’s largest cryptocurrency exchanges, holds his $4.4 billion on its balance sheet and is a fifty-fifty partner with the Circle in the Center consortium, which oversees the technical side of USDC. Given its large investment in USDC and its partnership with Circle, Coinbase has a vested interest in ensuring the stability of stablecoins.
This could mean that Coinbase could provide additional support to Circle and further strengthen USDC stability if needed. Coinbase has a strong reputation in the cryptocurrency industry and has demonstrated a commitment to regulatory compliance and financial stability. As such, Coinbase’s involvement in managing USDC may bring more confidence to investors.
There are concerns about a possible USDC depeg, but several scenarios could play out over the next week. One possibility is that Coinbase, as a Center Consortium partner and major investor in USDC, could provide additional support to Circle if needed. This could take the form of additional financial support or other resources to ensure USDC stability. Another possibility is that Circle may take out loans from BlackRock and other institutional investors to strengthen its financial position.
This provides additional liquidity and helps address USDC stability concerns. The Federal Reserve could also step in to help the Silicon Valley Bank (SVB), the bank that holds the money backing USDC. While this may be viewed as an unlikely scenario, it cannot be ruled out entirely given the potential impact of USDC destabilization on the broader financial system.
There are several actions you can take regarding risk management for investors holding USDC. One option is to hedge the USDC/USDT perpetual swap by shorting his USDC through a centralized or decentralized exchange (CeFi or DEX). This strategy helps offset potential losses if USDC falls in value. Another strategy is that in a lending protocol he borrows USDC against USDT. However, the potential risks associated with USDC may limit this option. If an investor is concerned about the stability of USDC, he can also consider trading his USDC to his USDT at a rate of around 0.95 on the CeFi exchange.
This reduces your exposure to potential risks associated with USDC. It is also important to note that the investor must transfer his USDC to Circle to avoid redemption. Although the risk of gated redemption is relatively low, there is still potential risk of this occurring. Therefore, investors are advised to keep his USDC in a secure wallet and take appropriate risk management measures to protect their investment.
In conclusion, investors should remain vigilant and informed during market volatility, such as the current turmoil in the crypto sector surrounding USDC. It’s important to be calm and sharp rather than making impulsive decisions based on uncertainty and unpredictability. One way he stays informed is by following the latest information and analysis from trusted sources such as financial news outlets and industry experts.
It is also important to understand your investment portfolio, including potential risks and vulnerabilities. Taking a measured and calculated approach to investing can help mitigate potential losses and protect your assets. By staying alert and well-informed, investors can navigate market volatility and uncertainty with greater confidence and clarity.
