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11th March 2023 - Contagion!


The ramifications of the FTX fraudulent fiasco continue today with the de-pegging of USDC.

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Market Wrap

Though stocks are suffering in the wake of the collapse of SVB (Silicon Valley Bank) cryptos are holding up remarkably well, with BTC regaining the all-important 20-handle. The leveraged children are back out in force driving perpetual futures funding rates negative though I suspect they don’t realise that the demise of SVB is far more important to the tech start-up world than cryptos, despite its impact discussed below.

Curious Cryptos’ Commentary – Contagion!

The demise of Silvergate Bank (see CCC 3rd March for the start of the story) was itself contagion from the fraudulent fiasco at FTX.

That contagion has now spread from Silvergate to USDC (USD Coin), a stablecoin issued by Circle, with a less than helpful push by SVB.

In late January Circle reported assets 0.1% higher than liabilities of $42.2bn in the form of cash of approximately 26% of assets with the rest held in US Treasuries, mostly short-term.

This is what full collateralisation in high-quality assets looks like for a stablecoin. Since June 2021 the price of USDC has hardly budged from a dollar.

But – and this is a big but – some of those cash reserves were held at Silvergate, as well as SVB, which was seized by the US regulators yesterday following an old-school bank run.

As an aside, the collapse of SVB is itself an interesting case study. Having nearly tripled deposits to $180bn by the end of last year since the start of the pandemic, much of this extra cash had been invested in long-term US government bonds and mortgages. The end of QE (quantitative easing) brought large, unrealised losses, to that bond portfolio. As awareness grew of this problem, clients started to remove their deposits. To stay solvent the bank had to sell treasuries, realising those losses, and effectively condemning the bank to a death spiral.

Once again, the madness of QE – one of the most destructive policies ever initiated by central banks worldwide and surely never to be repeated - is laid bare for all to see.

But back to the main point of this story.

Circle has yet to clarify how much of their cash deposits are with Silvergate but have stated $3.3bn remains at SVB. It will take years for the bankruptcy process to play out, but clearly Circle will take a significant haircut on those deposits. As a result, you will not be surprised to learn that USDC has lost its dollar peg:

A quick and dirty calculation (3.3bn is 8% of 42.3bn) suggests that a price of 91c is a reasonable estimate of where USDC should trade given the uncertainty around the size of deposits remaining at Silvergate and the extent of haircuts at both institutions.

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