USDC is Collapsing: DEPEG is happening

Boxmining avatar Boxmining
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Description

USDC has 25% of USDC is being held in 6 different banks, one of which is SVB . With SBV collapsing after failing to raise capital is USDC in trouble? Will FDIC deposit insurance cover the hole? 🌼 GE...

AI Analysis

The crypto world is in a panic as USDC, a stablecoin previously considered one of the safest due to its regulated nature and backing by Coinbase, has de-pegged from the US dollar. This crisis was triggered by USDC's significant exposure to Silicon Valley Bank (SVB), which recently collapsed, leading to widespread fear, particularly among users in Asia who woke up to the news. The situation highlights the fragility of seemingly "safe" regulated entities in both traditional finance and crypto.

Here’s a breakdown of what went down and how people are reacting:

* USDC's De-pegging Nightmare: The stablecoin, meant to stay at $1, plunged significantly, starting from 97-98 cents down to 88 cents, and even briefly to 80 cents, representing a massive "haircut" for holders. This happened primarily when Chinese and Asian markets woke up, leading to a surge of fear and panic selling. The general belief was that USDC was regulated and safe, unlike the "shady" USDT, making this collapse even more shocking.

Circle's "Meaningless" Tweet: Circle, the issuer of USDC, tried to calm the markets with a tweet stating that $3.3 billion of its $40 billion USDC reserves remained in Silicon Valley Bank. However, this statement was seen as intentionally vague and "shady," implying that "assets are fine while awaiting clarity*," which suggested things might not be fine once clarity arrived. The presenter felt it was a carefully worded statement by lawyers to provide minimal confidence while offering a potential out.

* The "Black Swan Event" Shifts to Traditional Finance: This event isn't just about crypto; it marks a significant shift as the "Black Swan event" (an unpredictable and impactful event) has now moved from crypto (like FTX) to traditional banking. The presenter noted this is genuinely scary because bank runs are happening in America, affecting much larger sums than previous crypto collapses.

* Individual Strategies During the Crisis:
* Nate's Experience: Having been burned by Luna/UST and FTX previously, Nate had moved 90% of his funds to a non-custodial wallet in USDC, believing it was "too big to fail." Upon seeing the de-peg, he immediately sold all his USDC in tranches, converting some to Bitcoin and some to USDT, even though it meant taking a 3-5% hit due to high fees on his non-custodial wallet. He emphasized that being "out" allowed him to "sleep at night."
* Phil's Quick Exit: As a more risk-averse person who avoided the Luna and FTX debacles, Phil immediately exited his USDC holdings as soon as the de-pegging began, prioritizing a fast exit.
* The Presenter's Calculated Hold: Unlike Nate and Phil, the presenter decided to hold a portion of his USDC, refusing to take a 10-13% haircut immediately. He believes that the current market sentiment is at "max fear" and irrational. He predicts that Monday, when banks open and Circle can redeem funds, there will be an opportunity to exit with less loss. He also drew a parallel to past Tether de-pegs where OTC desks profited by redeeming de-pegged USDT for 1:1 USD.

* The Curve Pool Tragedy: A striking example of panic-induced irrationality occurred when an "unlucky user" lost $2 million by dumping a large amount of USDC into an illiquid Curve pool. In their haste to swap, they neglected to set their slippage correctly, effectively selling $2 million for just 5 cents. This was because they sold their LP tokens into a pool with almost no liquidity, highlighting the critical importance of staying calm and understanding the mechanics of decentralized exchanges, especially during high-stress situations.

* DAI's Domino Effect: The de-pegging spread beyond USDC, as DAI, another decentralized stablecoin, also fell significantly (down to 88-95 cents). This was a direct consequence of DAI being partially backed by USDC and Ether, demonstrating how interconnected the stablecoin ecosystem is and how a failure in one can trigger a domino effect across others.

* Understanding the SVB Collapse: The bank's downfall stemmed from a massive influx of deposits between 2019 and 2021 (from $61 billion to $189 billion). Instead of traditional lending, SVB invested heavily (over $80 billion) in low-yield (1.56%) long-duration mortgage-backed securities. When the Federal Reserve raised interest rates, these securities plummeted in value because investors could get much higher yields elsewhere. SVB was forced into a "fire sale" of $21 billion in securities at a $1.8 billion loss, surprising investors and triggering a rapid bank run. It was highlighted that this issue isn't isolated to SVB and that many other banks could be quietly affected by rising interest rates, potentially leading to further "dominoes falling."

* Bitcoin: The True Store of Value: Amidst the chaos, Bitcoin is holding strong and is seen as the "true stable coin" and the "true store of value," "backed by math." It's emerging as a crucial "way out" for people fleeing the banking crisis. While Bitcoin maximalists might dream of immediate fiat replacement, the presenter realistically stated that it's a multi-phase process and not likely to fully replace fiat currencies in the next decade.

* Gold as a Reliable Alternative: Physical gold was presented as a solid number two option after Bitcoin. The presenter even brought out a kilo of gold, noting its weight and liquidity, contrasting it with less liquid assets like Rolexes.

Regulatory Intentions: A strong opinion was shared that regulators, specifically the SEC, might actually "love for USDC to fail" to pave the way for Central Bank Digital Currencies (CBDCs). The SEC's inconsistent statements on whether Ethereum is a security were cited as evidence of them "flipping a dice" and "fcking with the market" for their own gain.

* Advice and Outlook: The main takeaway from the discussion is for people to "turn your brains on" and think rationally amidst the panic. While individual strategies differ based on risk tolerance, the general sentiment is that the current fear is at its peak. The future of USDC will likely be clearer on Monday when banks open. The presenter also mentioned that during a bull market, "DGEN coins" (low-cap, high-risk meme coins) often pump first, and he's even experimenting with a "secret ZK stock-based index" to track these as a preview indicator for when the bulls return.

Transcript

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