The following is a guest post from Anndy Lian.
The crypto industry is currently experiencing anxiety due to concerns about the possible breakaway of USDC, a US dollar-backed stablecoin. As an individual who closely follows the market, I have been watching the situation and would like to share some of my personal views.
First of all, it is worth emphasizing that Silicon Valley Bank (SVB), responsible for holding the funds that back USDC, reportedly has enough assets to meet all withdrawal requests. According to Federal Deposit Insurance Corporation (FDIC) reports, as of December 31, 2022, SVB had approximately $209 billion in assets and approximately $175.4 billion in deposits. However, despite the impressive asset base, there are still concerns about the liquidity of SVB’s book and what percentage cut would be expected if the bank were to experience significant losses.
This uncertainty arises from the fact that the bank’s underlying assets are not transparent and there are no clear indications of how illiquid or risky these assets might be. As a result, there is a risk that if SVB’s assets experience significant losses or become illiquid, the bank may find it difficult to meet all of its obligations, which could result in a USDC decoupling. This would have a significant impact on the broader crypto market, as USDC is widely used as a trading pair on various exchanges.
Secondly, another important aspect to consider regarding the stability of USDC is the financial backing provided by Circle, the company that issues the stablecoin. Circle holds 77% of its reserves in highly liquid instruments such as 1-4 month Treasuries, managed by Blackrock and held at BNY Mellon. This reserve allocation provides significant security for USDC, as T-Bills are generally considered to be very safe and highly liquid investments.
The T-Bills held by Circle provide an absolute floor for USDC around 0.77, which means that even in a worst-case scenario, USDC should not fall below this level. Also, since T-Bills are highly liquid, they should be easily sold if Circle needs to raise funds quickly to meet unexpected obligations.
This provides additional protection for USDC and helps mitigate any potential risk associated with the stablecoin. It’s also worth noting that Circle’s retained earnings and interest income should theoretically be enough to cover any expected “loss” you may be exposed to from SVB. This means that even if SVB were to experience significant losses or run out of liquidity, Circle should be able to cover any potential losses without affecting the stability of USDC.
Third, another point to consider when assessing the potential impact of a USDC depreciation is Circle’s maximum exposure. This company issues the stablecoin to Silicon Valley Bank (SVB), the bank that holds the funds that back the USDC. Experts estimate that Circle’s maximum exposure to SVB will be around $198 million, which is a relatively small percentage of the total funds backing USDC, which is approximately $3.3 billion.
While this may seem like a large sum, it is important to note that Circle has significant financial reserves and should be able to absorb any potential losses without significantly affecting the stability of USDC. The crypto market as a whole has grown significantly in recent years, with a current market capitalization of over $2 trillion. In this context, the potential loss of $198 million would represent 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.
Fourth, the relationship between Coinbase and Circle. Another factor that may reassure USDC investors is the relationship between Coinbase and Circle. Coinbase, one of the largest crypto exchanges in the world, has $4.4 billion on its balance sheet and is a 50-50 partner with the Circle in the Center Consortium, which oversees the technical aspects of USDC. Given its significant investment in USDC and its partnership with Circle, Coinbase has a vested interest in ensuring the stability of the stablecoin.
This may mean that Coinbase could provide additional support to Circle if needed, further strengthening USDC’s stability. Coinbase has a strong reputation in the cryptocurrency industry and has a proven commitment to regulatory compliance and financial stability. As such, Coinbase’s involvement in USDC management may provide an additional layer of confidence for investors.
While there are concerns about the potential decoupling of the USDC, several possible scenarios could play out over the next week. One possibility is that Coinbase, as a partner in the Center Consortium and a 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 help ensure USDC’s stability. Another possibility is that Circle could take on debt or lines of credit from BlackRock or other institutional lenders to help shore up its financial position.
This could provide additional liquidity and help address any concerns about USDC stability. It is also possible that the Federal Reserve will step in to support Silicon Valley Bank (SVB), the bank that holds the funds that back the USDC. While this can be seen as an unlikely scenario, it cannot be ruled out entirely, given the potential impact of a USDC destabilization on the broader financial system.
Various steps can be taken regarding risk management for investors holding USDC. One option is to hedge USDC/USDT perpetual swaps by shorting USDC through centralized or decentralized exchanges (CeFi or DEX). This strategy can help offset potential losses if the value of USDC were to decline. Another strategy is to borrow USDC against USDT in the lending protocols. However, this option may be limited due to the potential risks associated with USDC. Investors may also consider trading USDC to USDT on CeFi exchanges at a rate around 0.95 if they are concerned about the stability of USDC.
This can help reduce exposure to any potential risk associated with USDC. It is also important to note that investors should avoid sending USDC to Circle for redemption. While the risk of a closed redemption is relatively low, there is still a potential risk of this happening. As such, it is recommended that investors keep USDC in a safe and 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 ongoing malaise in the cryptocurrency sector surrounding the USDC. It is important not to make impulsive decisions based on uncertainty or unpredictability, but to keep your composure and a clear mind. One way to stay informed is to follow updates and analysis from trusted sources, such as financial news outlets or industry experts.
It is also important to understand one’s investment portfolio, including any potential risks or vulnerabilities. Taking a measured and calculated approach to investing can help mitigate potential losses and protect your own assets. By remaining vigilant and well-informed, investors can navigate market volatility and uncertainty with greater confidence and clarity.
This post Why USDC Depeg Is Not a Cause for Panic
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