Catalogue - Key Takeaways Show
Key Takeaways
- Silicon Valley Bank announces that they needed to raise $2.25 billion dollars to clear up their balance sheet on March 8th,2023.
- Investors withdraw up to $42 billion by the eve of March 9th following mass hysteria.
- California Regulator launches a probe into SVB and shuts down the bank on March 10th.
- USDC, the fifth largest cryptocurrency by market cap and one of the most popular stablecoin, lost its peg to the US dollar on Saturday, 11th March 2023.
How Did SVB Collapse?
To understand the SVB collapse saga it is important to understand how banks function. Essentially, banks use depositors’ money to lend loans to firms at a specific interest rate. In the last few years, the interest rate has been low making it a viable option for firms to take loans for scaling their business operations.
The SVB collapse could be tied to a few relatable points. The fed has raised interest rates by 0.50 to 0.75 points multiple times. The Federal Fund rate has been increased by 4.5-4.75 per cent. The Fed’s pledge to fight inflation by increasing interest rates have drastically reduced the returns on government bonds and has impacted the overall volume of depositors.
SVB also announced that it had sold shares worth $21 billion at a loss of $1.8 billion as the liquidity in the reserves was diminishing. Many institutional clients comprising of venture capitals decided to withdraw their funds to minimize any risks. However, the bank was not ready for such panic withdrawals by depositors. On Friday, the bank tried to sell its shares, but the state regulators stepped in and shut down the bank.
USDC Depegging: What Really Happened?
Following the SVB collapse, any business entity that had an exposure to the bank was directly affected. SVB held the deposits for many tech firms, including Circle, which issues the USDC stablecoin.
Over the weekend, the USDC “stablecoin” lost its peg to the USD after Circle confirmed that 3.3 billion dollars of the assets backing USDC were stuck with SVB. This amounts to around 8% of USDC’s total supply. As soon as this information started gaining traction, panic selling kicked in. It pushed the price of USDC to $0.88 on most exchanges.
A spokesperson for Circle said “While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle and USDC continue to operate normally. “
The USDC depeg led to a domino effect in the crypto industry as it knocked over several other stablecoins like DAI, USDD, and FRAX along with it. Circle tried to ease the situation by announcing that, if required, it would use corporate “reserves” to cover the hole caused by SVB.
Circle also announced that it added Cross River as its new banking partner. Cross River Bank also serves Visa, Coinbase and other high-profile clients. According to the press release, Cross River Bank will help Circle in minting and providing USDC stablecoins to its users. The firm also added that they are expanding its current relationship with BNY Mellon. The firm is already offering custody services for USDC. To ensure that there is no further panic in the crypto community they added that they do not have any exposure to Silvergate bank which collapsed last week.
The USDC stablecoin regained its peg to the USD on March 12th, 2023, after the Federal Reserve Board of the United States stepped in and announced a $25 billion programme to protect SVB depositors like Circle. This intervention helped to restore confidence in the stablecoin. As the cryptocurrency market continues to evolve, it will be important to closely monitor the actions of financial institutions and regulators to ensure the long-term stability of stablecoins and other cryptocurrencies.
What Can You Learn from the USDC Depegging
The de-peg of USDC is a worrying one and has caused some damage to the investor’s trust. However, if there is a silver lining to this whole SVB-USDC fiasco, it’s the fact that a lot of people were anticipating a UST-like crash, which didn’t happen. USDC held up its end pretty well like USDT in the past, as it has now gone through and survived what could’ve been a major blow to the stablecoin and the whole crypto industry, which is a good sign.
And while stablecoins are designed to store value and act as a medium of exchange, it isn’t always so as we have seen from recent times when UST crashed to almost worthless or the recent USDC de-peg. There is some responsibility that falls on your end, as a trader and investor. You must be vigilant when selecting which stablecoins to keep your money in as it could minimize your risk exposure to the market.
Here are the best practices you need to keep in mind when holding stablecoins.
- Research the stablecoin: Before you convert your crypto into a stablecoin, you need to make sure that you do the needed research to understand how the stablecoin keeps its value stable. There are different stablecoins, which have different underlying mechanisms for reserve like fiat currency, commodities, or algorithms.
- Choose a reputable issuer: Each stablecoin is backed by an issuer whose job is to keep everything transparent. You must find a stablecoin that is backed by a reputable issuer with a proven record of maintaining price stability and transparency during volatility and FUD.
- Diversify your portfolio: Last, but not least, the best advice anyone could give you which it comes to the financial markets is to never put all your eggs in one basket. You should consider holding multiple stablecoins.
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