Market Analysis: Silicon Valley Bank, Circle & USDC

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Source: CryptoCompare

Last week, the second largest collapse of a major U.S. bank occurred in history, as Silicon Valley Bank (SVB) was abruptly closed by U.S. regulators following a panic-induced bank run. SVB, which had strong ties to the venture capital industry and a reputation as a crypto-friendly bank, had been heavily utilised by many in the digital asset sector. As such, the sudden collapse of SVB placed Circle and its flagship stablecoin USDC under immense pressure, as the stablecoin issuer held ~$3.3 billion (about 8% of its total reserves) with the bank.

The situation has developed quickly, with USDC depegging to a low of $0.8726 (CCCAGG pricing) on March 11th before recovering to $0.9918 on March 13th, with the stablecoin still off its peg at the time of writing. Having said this, the Federal Deposit Insurance Corporation has ensured that depositors of SVB will be made whole — easing worries of further contagion across the banking sector.

A Dive into USDC

As concerns over USDC’s reserves started to arise, the stablecoin started to decline, falling as low as $0.8726 on the 11th of March. CryptoCompare data shows that USDC trading volume rose 249% on the day as traders and investors rushed to convert the stablecoin to other assets.

Other stablecoins, including DAI, FRAX, and Magic Internet Money, also lost their parity as they held USDC in their reserves, leading users to sell their holdings for other assets. Rival fiat-redeemable stablecoins including USDT, BUSD, and TUSD largely held their peg, with the sudden increase in demand pushing the price of TetherUSD to $1.035, the highest since November 10, during the collapse of FTX.

One of the major concerns during the turmoil was the illiquidity of USDC pairs on centralised exchanges. As USDC was not listed on Binance, the largest and most liquid exchange in the industry, traders had to resort to other non-liquid exchanges which are more susceptible to the volatility of prices.

As a result, the liquidity on these exchanges witnessed a sharp fall for USDC pairs. Coinbase’s BTC-USD liquidity (which is a unified market for USD and USDC on Coinbase) saw a sharp decline of its 1% market depth which was more severe than when FTX collapsed. 1% market depth fell from 846 BTC on the 10th to 417 BTC on the 11th, a 50.7% decline.

With the illiquidity adding to the high volatility in the price of USDC, CryptoCompare trade data shows that panic-stricken traders converted USDC to USD at prices as low as $0.12 on centralised exchanges.

On Kraken, the trades bottomed at 0.87 USDT with a buy order of USDC 112k, while on Coinbase trades bottomed at 0.84 USDT with fairly minor trades. Bitstamp saw a major drop in prices, however, with very small trades being executed at a low of $0.12.

Despite the liquidity crunch, there hasn’t been any significant decline in exchanges’ outflows, as both outflows and inflows witnessed spikes, resulting in a slight overall positive inflow for USDC. We attribute this to some traders trying to make arbitrage profit from the USDC peg as seen when analyzing trades using CryptoCompare trade data.

The on-chain world also experienced stablecoin-related distress, which led to soaring trading volumes on Decentralized Exchanges (DEXs). DEX volumes rose from $7.14bn on March 10th to $25.0bn on March 11th; a 249% hike. Gas fees on Ethereum also reached their highest level in 2023 so far, recording 101 Gwei, as blockchain network activity increased.

Looking Forward

The events of the last few days have made it clear that crypto still heavily relies on the traditional financial system, highlighting the issues with centralised stablecoins. While crypto aims to be an antifragile system, a chain is only as strong as its weakest link, and the fact that the largest stablecoins are exposed to woes in traditional finance puts into question the general fragility of crypto.

Following this, it is important to note that Circle has proven to have effective management of its collateral reserves — with 77% held on short-dated Treasury Bills at BNY Mellon, a Systemically Important Financial Institution (SIFI), and now most of its remaining cash (c23% of reserves). Circle’s response has illustrated a sensible and efficient reserve system that will breed long-term confidence in its ability to manoeuvre around any potential future issues with traditional banking.

The failure of SVB has highlighted the impact that the Federal Reserve’s interest rate hikes have had on the broader financial system. Indeed, while SVB mismanaged its balance sheet by holding government bonds that have declined in value significantly over the last year (due to the Federal Reserve’s interest rate hikes), this was a Fed-induced crisis.

Over the last year, the central bank’s rapid rise in interest rates has led anyone holding treasury bonds (most importantly long-dated notes) to be underwater on their positions. Of course, these would still be profitable when held to maturity, but the rise in rates means current holdings have declined market value, and if a bank run ensues (which occurred to SVB), the bank is forced to sell its securities at a loss and unable to return all monies being withdrawn.

Importantly, the Federal Reserve’s rate hikes contradicted the guidance they were providing market participants throughout 2021, prior to rising inflation. In this way, an important factor that led to the failure of SVB was the tight monetary policy employed by the Fed, and while its objective of lowering inflation through higher rates has proven successful (so far), it has also led to significant unrealized losses in bank’s balance sheets, making them more prone to bank runs.

If you would like additional insight into the Stablecoin sector, then make sure to check out our Stablecoins & CBDCs Report, which is released monthly. The last edition can be found here.

This blog report showcases CryptoCompare’s market-leading digital asset data. Try the data for yourself and gain access to crucial real-time information necessary for accurately tracking market movements, complete with tick-level trade history across all covered instruments and markets, at the highest granularity provided by each exchange. Learn more about our market-leading digital asset data below.

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