Why USDC’s Depeg is not a Reason to Panic: An Analysis of Stability and Risks

As the crypto industry continues to grapple with the anxiety surrounding the potential depeg of USDC, a stablecoin supported by US dollars, it’s important to analyze the stability of USDC and associated risks. The situation can be likened to a game of chess, where each move must be calculated carefully to protect the king from being taken.

Silicon Valley Bank (SVB), responsible for holding the funds backing USDC, reportedly has enough assets to meet all withdrawal requests. It can be compared to a fortress with enough armor and weapons to withstand any attack. However, the lack of transparency regarding the bank’s underlying assets means there is a risk that it may struggle to meet all of its obligations, potentially resulting in a depeg of USDC. This is similar to how the French army, despite having a massive army, was defeated in the Battle of Agincourt due to poor planning and decision-making.

Another aspect to consider is the financial backing provided by Circle, the company that issues the stablecoin. It’s like a shield protecting USDC from any incoming attack. Circle holds 77% of their reserves in highly liquid instruments such as 1-4 month T-Bills, managed by Blackrock and held at BNY Mellon. This allocation of reserves provides significant security for USDC, similar to how the ancient Roman army protected themselves with shields in a battle.

Circle’s retained earnings and interest income should theoretically be sufficient to cover any expected “losses” it may be exposed to from SVB, meaning that even if SVB were to experience significant losses or become illiquid, Circle should be able to cover any potential losses without impacting the stability of USDC. It can be compared to how Julius Caesar, during the Gallic Wars, was able to withstand the losses of his legions and continue to conquer new territories.

Another point to consider when assessing the potential impact of a depeg of USDC is the maximum exposure of Circle. Experts estimate that Circle’s maximum exposure to SVB will be around $198 million, which is a relatively small percentage of the total funds backing USDC, approximately $3.3 billion. It’s like a small ship in the middle of the ocean; even if it sinks, it won’t cause a massive tidal wave that will destroy everything in its path.

The relationship between Coinbase and Circle is also worth noting. Coinbase holds $4.4 billion on its balance sheet and is a 50-50 partner with Circle in the Centre Consortium, which oversees the technical aspects of USDC. Coinbase has a vested interest in ensuring the stability of the stablecoin and can provide additional support to Circle if needed, further strengthening the stability of USDC. It’s like a powerful ally that can provide backup during a war.

In conclusion, while there are concerns about the potential depeg of USDC, there are several possible scenarios that can play out over the next few days. Investors can hedge USDC/USDT perpetual swaps by shorting USDC through centralized or decentralized exchanges (CeFi or DEX) or borrow USDC against USDT on lending protocols. The situation can be likened to a game of chess where each move must be calculated carefully to protect the king from being taken. Therefore, there is no need to panic as long as investors are vigilant and prepared for any potential risks.