Personally I think USDC will be fine in the short to medium term and remain in the 94-98c range. There will likely be volatility, but my guess is that the low of 87c is already in and I doubt it’ll drop under 90c again (excluding the odd whale dump) unless we see some other black swan event, but I’m not sure what that would be.
Quick intro for those who have no idea what’s going on
USDC, the 2nd largest stablecoin with 40.85b in circulation, last night de-pegged all the way down to $0.87, though as I write this it is trading around $0.956.
USDC was created by Circle and Coinbase.
Yesterday Silicon Valley Bank (SVB) went bankrupt. SVB is the U.S’s 16th largest bank and has $175b in customer deposits, $3.3b of which were held by Circle and backed USDC. This is the second largest bank failure in U.S history, and the largest since 2008.
Last night at 7:12pm Binance paused conversions of USDC to BUSD, and at 9:41pm Coinbase paused 1:1 USDC/USD conversions over the weekend.
Concern over Circle’s SVB exposure and USDC’s solvency last night triggered a selloff down to $0.87, which has since reverted back to $0.95. Circle’s press release today temporarily boosted the price back up to $0.98, though as I write this the price is back down to $0.956.
The stablecoin DAI also traded heavily down. USDT actually temporarily surged above peg.
USDC Reserves
Circle (creators of USDC along with Coinbase) has 40.85b USDC in circulation backed by $42.1b in reserves composed of:
- $32.4b (77%) in U.S Treasury bills with a 3 month or less maturation period, currently yielding 4.54%. This amounts to $1.47b/yr in interest payments. These reserves are custodied by BNY Meloon, and active liquidity and asset management is managed by BlackRock.
- $9.7b (23%) in cash
- $5.4b with BNY Mellon.
- $3.3b with Silicon Valley Bank, which is now bankrupt. That being said, depositors will likely get 70-90%+ of their money back, though it could take some time.
- $1b with Customers Bank
- Circle maintains transaction and settlement accounts for USDC with Signature Bank (?)
Source: https://www.circle.com/blog/an-update-on-usdc-and-silicon-valley-bank
If these numbers are correct, it would appear that USDC is actually overcollaterized by about $1.25b, meaning a $1.25b loss would theoretically still have USDC being fully backed.
But let’s ignore that and consider a couple scenarios
Scenario #1 – All of Silicon Valley Bank and Customers Bank deposits lost
USDC: $0.898
Lost value: $4.3b
Time it would take for interest payments to recoup losses (roughly, assuming constant interest yield): 2.92 years
Likeliness: 0%, since a portion of deposits will be redeemed. There is currently no bad news around Customers Bank
Scenario #2 – All $3.3b of Silicon Valley Bank deposits lost
USDC: $0.92
Lost value: $3.3b
Time it would take for interest payments to recoup losses (roughly, assuming constant interest yield): 2.2 years
Likeliness: 0%, since a portion of SVB deposits will be redeemed
Scenario #3 – Only 80% of all $9.7b in cash reserves redeemed
USDC: $0.954
Lost value: $1.94b
Time it would take for interest payments to recoup losses (roughly, assuming constant interest yield): 1.3 years
Likeliness: Very low since that would require BNY Mellon and Customers Bank to also go bankrupt
Scenario #4 – 80% of Silicon Valley Bank deposits redeemed
USDC: $0.984
Lost value: $660m
Time it would take for interest payments to recoup losses (roughly, assuming constant interest yield): 5.3 months
Likeliness: Probable if BNY Mellon and Customers Bank also don’t break. Even conservative as it’s definitely possible >80% of deposits could be redeemed.
Overall it doesn’t seem that anything under $0.90 is justified. Even $0.95 seems lower than justified.
Risks
Again the main risk here is contagion. If BNY Mellon or Customers Bank were to fail, that would be bad.
But the reason I’m not worried is that as you can see, even a total wipeout of all its cash reserves would still put USDC at $0.92. Any price below that and I’ll probably be buying pending no new information.
USDC is the 2nd largest stablecoin and there’s a ton of wealthy institutions with a vested interest in it not failing – companies like Blackrock, BNY Mellon, and Coinbase.
My guess is that USDC won’t resume USDC:USD conversions on Monday, at least not in a full capacity. Maybe they’ll limit it such that accounts can only convert up to $20k/day or something like that. But this is just me purely guessing and I don’t say this with any degree of confidence.
Unfortunately there’s no better stablecoin alternative to USDC with similar amounts of liquidity. USDT is bigger but a complete black box. Until there’s something superior, USDC has a bit of a moat.
Anyways not financial advice, but I am personally not too worried about USDC, and I’ll probably be looking to buy if it dips below 92c, again pending no new information. But do your own research!
Alright I gotta catch a flight, peace.
J. Savage 