USD Coin (USDC) plummets to all-time low
USD Coin (USDC) plummets to all-time low after Circle reveals $3.3bn reserves held at collapsed Silicon Valley Bank. Should you be worried about it? Do you use USDC for crypto arbitrages?
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USD Coin (USDC) plummets to all-time low
On Saturday, the value of USD Coin (USDC), the world's fifth-largest cryptocurrency, reached an all-time low after Circle, the company responsible for the coin, disclosed that $3.3 billion of its reserves were held at Silicon Valley Bank, which had recently collapsed.
As a stablecoin, USDC is intended to maintain a steady value equivalent to the dollar, but it fell to $0.87 on Saturday morning, breaking its 1:1 peg to the dollar. On Friday, Circle had revealed that $3.3 billion of its $40 billion USDC reserves were held at Silicon Valley Bank, and the consequences of the bank's failure are still being assessed.
This happened following the collapse of Silicon Valley Bank on Friday, which is the largest US bank failure since the 2008 financial crisis, global markets have been thrown into turmoil, and billions of dollars belonging to companies and investors are now stranded. Depositors who are worried about their funds have formed long queues outside SVB's branches, hoping to withdraw more than the $250,000 that is guaranteed by federal banking regulations.
Currently, concerns about the contagion effect on other areas of the financial system appear to be limited on cryptocurrencies early on Saturday. But things are rapidly evolving and a clear picture would emerge only in coming days.
SVB did business with almost half of all US venture capital-backed startups and 44% of US venture-backed technology and healthcare companies that went public last year. However, none may be more vulnerable than the cryptocurrency business, which is already struggling due to the broad decline in token values across the board and the bankruptcy of FTX, a crypto-exchange that resulted in CEO Sam Bankman-Fried being arrested on fraud charges.
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USDC is a stablecoin which is used in cryptocurrency trading, they have surged in value in recent years. USDC is the second-biggest stablecoin with a market cap of $37bn . The largest, Tether, has a market cap of $72bn, according to news sources.
While Saturday's drop in the value of USD Coin (USDC) was unprecedented as the stable coin's price typically stays close to $1. Recently, it fell just below $0.99 in 2022 when the cryptocurrency market was affected by the collapse of Three Arrows Capital.
Traders are concerned about contagion in the financial sector and beyond following the collapse of Silicon Valley Bank and the announcement of the voluntary liquidation of crypto-focused Silvergate Bank.
Several other cryptocurrency companies, including Binance, Tether, Paxos, and Gemini, have stated that they have no exposure to Silicon Valley Bank.
What is Stablecoin?
A stablecoin is a type of cryptocurrency that is designed to have a stable value, usually pegged to the value of a real-world asset, such as a fiat currency like the US dollar or a commodity like gold. Stablecoins aim to provide the benefits of cryptocurrencies, such as decentralization and fast transaction speeds, while mitigating the volatility that is often associated with traditional cryptocurrencies like Bitcoin. Stablecoins can be used for a variety of purposes, including as a medium of exchange, a store of value, and a unit of account. They are often used in cryptocurrency trading, as well as for remittances and other financial applications.
Should you be worried about this?
Do you remember what happened to Terra Luna and more importantly it's collapse approximately a year back. Terra Luna was a cryptocurrency or rather another stablecoin. It was called UST (TerraUSD) and its main objective was to maintain price stability. On March 10, 2022, the price of UST dropped from its peg of $1, causing the price of Terra Luna to drop sharply as well. This triggered a liquidation event on several DeFi platforms that use the stable coin UST, leading to a cascade of sell-offs and further price declines. The drop in UST's price was caused by a surge in demand for US dollars due to concerns about the health of the crypto companies in general, combined with a shortage of dollars in the crypto ecosystem. This resulted in a "black swan" event that caught many investors off guard and caused significant losses in the Terra Luna ecosystem.
The incident highlighted the risks associated with stable coins and the need for robust risk management strategies in crypto. Traders in crypto arbitrages have to be specially vigilant about this. Two days back we issued an advisory to our top clients to move the funds from USDC to USDT.
It is too early to determine the full extent of the fallout from the collapse of Silicon Valley Bank (SVB) and its potential impact on the broader financial system, including the crypto markets. However, as of now, concerns about contagion to other areas of the financial system appear to be limited to cryptocurrencies. USDC, the world's fifth-largest cryptocurrency, saw its value drop to an all-time low on Saturday after Circle, the US firm behind the coin, revealed that $3.3bn of the reserves backing it were held at SVB. It remains to be seen whether this isolated incident or if it will have wider implications for the crypto industry.