Rapture #274: Macro Commentary and How USDC was Affected by SVB Failing

Before I get into the meat of why USDC price was affected by the failure of SVB, want to quickly comment on market price action.

The past week of price action has truly been wild. After the fed decided to come in and backstop depositors of SVB, BTC and risk assets overall rallied sharply. Yet today, nearly all of the major Europeans banks are down 5 - 10% and Credit Suisse is down nearly 17% today as the Saudi National Bank stated that they will not be buying any more shares of the company. Credit Suisse now has a probability of default of 47%.

While I do think the US federal government was able to stem the contagion of a banking crises spreading within the US, I do not know if Europe will be able to execute the same policies considering their weaker financial position.

These worries are currently affecting all markets (S&P 500 down nearly 2% today), though crypto is holding up surprisingly well.

The response to these issues whether now or in 6 - 12 months will likely be a resumption of QE and/or lowering rates. This position is widely anticipated by other market participants as well. In my opinion, the US will be the last to resume QE. For now, I think the US continues to hold rates high and maybe even hikes a wee bit more.

Until the resumption of QE, all bets are off in terms market direction for both crypto and macro. I have decided a roughly 50% allocated and 50% cash/short duration treasuries is the appropriate allocation for myself at this point in time.

Now, let me briefly explain why USDC came temporarily unpegged during the failure of Silicon Valley Bank.

Circle deposited USDC cash reserves into SVB

For those of you who don't know, USDC is one of the leading stablecoins in the market with roughly a $40 billion market today.

Usually, at any time, users can convert 1 USDC into $1 via Coinbase or Circle. The consortium behind USDC (spearheaded by Circle) backs USDC mostly by cash and short-duration treasuries. Approximately 1/4 of the backing of USDC is held in cash while 3/4 is held in short-dated US treasuries.

The cash positions are spread across multiple banking partners, one of which was SVB.

When SVB went into receivership last week, Circle announced that approximately $3.3 billion of the around $40 billion reserves for USDC (almost 8.3%) was held in SVB. This $3.3 billion held at SVB represented roughly 30% of the total cash reserves used to back USDC.

Furthermore, over the weekend, Coinbase shut down a user's ability to convert their USDC into USD.

These actions together caused users to panic, as they worried that if enough people tried to convert USDC into USD at once, redemptions would not be met. Consequently, the peg temporarily broke on USDC and price fell to a low of approximately $.878 on March 11th.

Repegged

Since the Fed announced they would be making whole all the depositors into SVB, and because of Circle's communication during the crisis, the market regained faith that in USDC. By March 13th, the token repegged to $1.

I think the likelihood of this exact issue occurring again is small since the Fed has now set a precedent of backing deposits.

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