Letter 37: SVB & USDC
Is USDC going to zero? No!*
*or at least, I am personally feeling like it is unlikely that USDC is going to zero. Not financial advice, DYOR, etc etc etc.
Let’s take a step back and look at wtf has happened over the last 24hrs and why you might be waking up to the entire crypto / financial world on fire (again, again, again). Let’s start with SVB.
SVB
I’m going to try and ELI5 and avoid the complex technicalities of what’s happening — there are umpteen posts out there for you to read if you want that perspective.
What is SVB?
SVB is the Silicon Valley Bank. Yesterday it was revealed that they’re collapsing for a variety of reasons. A bank run ensued. They halted all withdrawals.
How did this happen?
The tldr as far as I can tell is that SVB took customer deposits and invested them in US treasury bonds that effectively lock up the money for 5-30 years and pay a modest return. In other words, customer deposits were not held in something liquid, so when the market caught whiff that the bank might be in trouble - everyone rushed to withdraw - and they couldn’t cover all the withdrawals.
The good news is that the customer deposits are not entirely gone, they are just.. locked up for a very long time. They also probably lost some value due to interest rate hikes, and without going into too much detail: interest rate hikes = bad for banks / people that invested and locked up large amounts at lower rates several years ago.
There is a secondary market for US Treasuries and there is a price at which someone will buy these. The problem is the amount we’re talking about (somewhere around $150bn, I think), and the timeline. The problem is that a lot of companies had their cash reserves in SVB and need it to pay operating costs, ie payroll, and they might not get any sort of access or resolution for quite a while.
Who does this impact the most?
Start-ups and early stage companies. Tech companies with 10-100 employees are probably most at risk, but the impact will likely be felt far and wide.
How big of a deal it this?
SVB is / was the 16th largest bank in the US, and this is the 2nd largest bank failure in the history of the US, second only to Washington Mutual in 2008.
Is it really that bad?
Who knows. It’s definitely BAD, but in terms of “this is going to cause the next GFC”, nobody knows. There is a tonne of unknown information at this point, and anyone matter-of-fact saying “this is definitely going to be worse than then” or “don’t worry, there’s no chance this is going to be as bad as then” should be taken with a grain of salt.
The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people are so full of doubts - Bertrand Russel
The most sensible approach is to look at this through a lens of probablistic thinking: basically, there’s some % chance the bank is bailed out in entirety or some other capacity, some % chance other banks fall and this is a canary in the coal mine event, some % chance this is like march 2020 when the covid cause mass panic and everything crashed but then.. turned around, some % chance this is going to lead to catastrophic fallout, and some % chance for the other infinite possible outcomes. Anything is possible, some things are more likely than others, and I can’t tell you what percentages to assign to what possible outcomes. Manage your personal risk and situation appropriately.
What’s next?
Things are unfolding in real time and we should know a lot more by Monday. Companies who had their funds in SVB are hurting the most. If a resolution isn’t found, and fast, a lot of start-ups are going to have to shut down. A lot of people will be out of jobs. It really sucks.
People are quick to assign blame, and it is right to be extraordinarily critical in situations like this to figure out exactly what happened, who/what is at fault, and how to avoid this happening again in the future.
That said — please remember that a lot of people are hurting. A lot of people did nothing wrong and are going to be significantly impacted by this. Be kind, be empathetic, and offer and type of support you can to your friends, customers, clients, co-workers, bosses, and, well, just anyone and everyone. It’s quick and easy to turn to anger and play the blame game and a lot of people are going to be plenty frustrated - but empathy makes the world go round.
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USDC
Okay let’s bring this home to crypto a bit.
When you wake up and see a chart like this, it’s normal to panic
Stable Coins are meant to be… stable. Any time a stable coin de-pegs from the $1 value, there is cause for concern. Flashbacks to UST might flood your mind:
Let me start by saying these are two very different situations, even though, on the surface, they seem similar (a stable coin going down in price).
Not all stable coins are created equal.
There are different types of ways a coin is able to remain “stable”.
UST was what is known as an “algorithmic stable coin”. The tldr here is that it attempted to use (debatably) fancy math and ponzinomics and continual minting of tokens to “back” the coin, and it all eventually unravelled.
USDC is known as a “fiat-backed stable coin”. Effectively, all reserves are backed 1:1 with what are meant to be safe, low-risk, real-world US dollars.
Generally, it’s a lot safer to have your stable coins backed by non-speculative non-ponzi based assets and schemes (shocking, I know).
Circle (the company behind USDC) is very transparent about its funds. If we are to believe their reporting — which I have no reason to doubt, but in this day and age I never trust blindly — they had about $3.3b of their total approx $40bn reserves held in SVB:
Where is the rest of their reserves? According to their latest Independent Accounting Report (by Deloitte), as of Jan 31st, they had approx $33.7bn in US Treasuries maturing within 3 months, and $8.7bn as Cash held at U.S. regulated financial institutions.
Which institutions?
Cash held at U.S. regulated financial institutions: Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, a division of Flagstar Bank, N.A., Signature Bank, Silicon Valley Bank and Silvergate Bank.
USDC was not impacted by Silvergate, according to this update by them.
WHAT DOES ALL THIS MEAN?
As far as I can tell, the TLDR is that $3.3bn of USDC’s cash is “stuck” or “held up” in SVB. The worst case scenario for those funds is that they are worth zero, of course, but — if you remember what was said about how most of SVB’s funds are held in long-term treasury bonds — it’s unlikely that everything will go to zero.
Even if everything goes to zero, $3.3bn represents approximately 8.25% of all of USDC’s reserves. Assuming all the rest is safe, USDC shouldn’t be worth less than $0.9175. Obviously that’s an assumption and you need to consider whether the rest of their cash reserves are safe in the other banks, and any other risk factors.
If a bailout solution occurs (whether private or government) and SVB can cover all customer deposit and they are able to receive all $3.3bn from SVB, then USDC should be ‘worth’ $1.
If they are able to get $0.70 on the dollar from SVB, then USDC should be ‘worth’ about $0.975.
It seems like the market is currently pricing USDC in the $0.88-$0.92 range. This is changing by the minute though but it’s in the “sounds about right” range to my mind. I know people who are buying USDC at sub $0.90 prices. I know people who are shifting everything to other stables, or fiat, or BTC/ETH, or other things, at these prices.
I can’t tell you what to do. I can tell you the facts as I know them, based on about 2 hours of research, and encourage you to do further research on your own and make your own decisions about what might be best for you and/or your company.
I wrote this because I woke up to endless fear and doom and gloom on the timeline. It’s right to be concerned, but it’s helpful to have an understanding on what’s actually happening to be able to make informed decisions and not ones borne out of panic.
The content in this Newsletter is based on a couple of hours of research. I very well might have gotten some things wrong - even important things. Please don’t treat any of this as gospel, and always independently verify anything written here. If you think something I said was inaccurate, please comment and I will edit in a correction.
Happy weekend everyone 🫠
Disclaimer: The content covered in this newsletter is not to be considered as investment advice. I’m not a financial adviser. These are only my own opinions and ideas. You should always consult with a professional/licensed financial adviser before trading or investing in any cryptocurrency related product.
Thank you so much for the valuable info.
Wild times. Thanks for the clear-eyed perspectives.