USDC Stablecoin Chaos Explained in 3 Easy Charts
USDC Stablecoin Loses Access to $3.3 out of $40 Billion in Reserves Due to Collapse of Silicon Valley Bank
One of the biggest banks in tech collapsed in 48 hours. What happened next shocked the crypto world.
USDC, the stablecoin that holds $40 billion US dollars in reserve in a 1:1 ratio with each cryptocurrency unit… decoupled.
1 USDC was no longer worth $1 USD.
It even hit about $0.88 at its worst drop so far.
How? Why?
Because it turns out that USDC was holding $3.3 BILLION (8.25%) of its total reserves in Silicon Valley Bank — which after a run on that very same bank Thursday afternoon and Friday morning by worried investors & startups collapsed and was immediately taken over by the FDIC.
Background on Circle and USDC
Circle is a company that issues USDC, a cryptocurrency stablecoin.
A stablecoin, in simple terms, is a cryptocurrency token that can be used on a given blockchain (such as Ethereum), and the issuer has a financial strategy in place that “pegs” the value of the token to a certain value.
In the case of USD coin (USDC) they pegged their token at one U.S. dollar by holding around $40B in reserves against the slightly more than 40,000,000,000 tokens they have in circulating supply.
The fact that the fully diluted market cap of $38,792,674,235 doesn’t match the circulating supply of 40,864,504,619 USDC tokens is a very bad thing and means that USDC is no longer acting as a stablecoin.
Panic in the Disco
At around 6:00PM ET the initial market vibrations began as trading volume began steadily rising and USDC began decoupling from it’s $1 peg.
By the time Circle officially announced their partial exposure at 10:11PM on Friday, March 10th 2023 of $3.3 billion — well, that’s when things went completely off the rails.
By 11:00PM ET the trading price had dropped to $0.95 and by 3:00AM ET Saturday morning was touching $0.88.
After over a year of extremely steady trading at around $1.00 suddenly the market was rocked by a huge sell-off as traders moved quickly into other stablecoins they hoped weren’t exposted to the SVB fallout, such as Tether — which reached $1.06 at one point!
But this isn’t the first time USDC has lost its peg to the dollar, it’s just the worst.
What Happens Next?
Will we see a rapid collapse of Circle in the same way we saw SVB itself collapse?
A recent tweet claims that Circle keeps 25% of its reserves in cash — its rapidly accessible liquidity pool — and, with the understanding that 25% represents approximately $10 billion of their reserves then the picture becomes clearer.
By losing access to $3.3 billion it’s not just an 8.25% loss of access to its reserves, it’s a 33% loss of access to its liquidity!
Updates!
U.S. Treasury Secretary Janet Yellen announced that depositors with Silicon Valley Bank and Signature Bank will have their full, uninsured, deposits available on Monday, March 13, 2023.
This puts the $3.3B back in the hands of Circle, and the price of USDC on the open market is reapproaching its peg at 10:30AM EDT 3/13/2023.
They also claim that they held no cash reserves were held at the now failed Signature bank.
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About the Author
Tim “Draconi” Cotten is a startup founder with two decades of experience in enterprise software, blockchain, and MMO game development.
Once upon a time he was the lead game designer of Ultima Online: Stygian Abyss, and when he’s not writing up stories from the wild west days of online gaming he’s working on applying all those hard-won lessons to his Metaverse startup: Scrypted.
Oh, and he made Picturdle! Can you figure out the daily picture puzzle?
