Stablecoin Crisis

Stablecoin is in the crisis mode.

The most reputable stablecoin USDC is depegged.

It is all triggered by the traditional bank collapse - Silicon Valley Bank or SVB collapse.

Why traditional bank collapse impacts crypto stablecoin?

Let's sort this out and reveal how stablecoin operates.

First, why SVB collapse?

The short answer is overleveraged.

SVB is one of the 20 largest commercial banking in the United States. Some even estimate the bank owned half of startup assets.

Bank operated in a fractional sense which they got no money to cover when everyone tried to withdraw all their money at once.

Although such even is rare, it can happen.

FDIC is a government insurance plan to prevent bank runs per each account up to $250K and to avert panic withdraw to protect customers' funds.

Of course, when customers deposit more than $250K in the bank, there is no insurance to recover the rest.

Risky as it sounds, that is why SVB collapses because there is no money to recover beyond $250K insurance plan.

Second, Cycle is the company behinds stablecoin USDC.

The company Cycle has a $3.3B deposit in SVB.

Cycle announced that SVB is one of the six banks that held up to ~25% of the cash of reserve for Cycle stablecoin.

We know that around 8.25% in cash stuck in SVB and they were all gone.

Cycle has $3.3B out of a total $40B short to peg 1:1 of the US dollar which means 1 dollar of USD gives 0.9175 of USDC.

If it means you got 8.25c short of each dollar, if you own USDC.

That is why many crypto exchanges suddenly pause the USCD/USD trade and wait for the Monday of bank opening.

Why wait for Monday?

SVB is gone and money is all gone. However, FDIC insurance will kick in Monday to recover a portion of the loss and possibly recover some more from the Cycle.

Thus, crypto exchanges are reluctant to risk losing their money during the weekend and USDC's reputation can no longer recover.

Then, what happen next?

If the Monday opening makes the Cycle to recover portion of their losses such as 50% of the total 8.25% recovered, that is 4.125% back to the reserve or 4.125c back from 91.75c and pump to 95.875c.

Of course, it still short from 1 but it gets a bit better for investors to return their portion of the money.

If the Cycle continues working with bankruptcy and they may get back 80% of total 8.25% losses, which is 6.6c back to pump to 98.35c.

Also, the Cycle got their 77% of assets in T-Bill, which the government backs. Therefore, the USDC absolute bottom is 77c.

To summarize the assumption of the Cycle USDC situation:

  • USDC worths 77c

  • On Monday 03/13, it will recover up to 95.875c

  • Long term, it will recover up to 98.35c

However, either way you do not want to get caught on the last 10% of the withdrawers who cannot get their funds out.

Bank runs will likely intensify in the coming week.

Even though the Cycle committed to peg 1:1, their reputation has been damaged and it is harder to get funds externally.

There is a hole of money around $2B ~ $4B short fall...

This also reveals a faulty of the stablecoin assumption that it is safe as long as there are assets to back it up.

It is not the case, any banks, even defined as safe, can still be closed, and stablecoin can be depegged easily.

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