The USDC currency is a “stable” currency – its purpose is to be a convenient and fast option for crypto investors to buy and sell other crypto currencies (such as Bitcoin or Ethereum for example). The idea is that the currency will always be equal to one dollar, so that for every dollar of assets that the company that issues the currency holds – Circle, the company will be able to issue one currency, and if an investor wants to convert his currency back to a real dollar, he can contact the company and do so . With the help of the stable currency, investors do not have to wait for bank transfers or wait for approval from the credit company to buy other cryptocurrencies, since all exchanges allow buying all cryptocurrencies using the stable currencies.
So far, and except for the Terra Luna case, which we will briefly explain later, investors in the crypto world have quite trusted these stable coins – the value of the three largest stable coins was over 100 billion dollars and all three are in the table of the ten coins with the largest market value. The three currencies are – USDT (current market value of $72 billion), which is issued by Tether, USDC (current value of $37 billion), which is issued by Circle and BUSD (current market value of 8.3 billion dollars), which is issued by the Binance exchange.
Today (Saturday), around 4:00 in the morning, the USDC currency started to lose its peg to the dollar, meaning that the value of the currency no longer stands at one dollar and at these moments it is trading for less than 90 cents. This event is extremely significant – many entities and investors rely on this currency and use it to keep a significant part of their cash. When such an asset, which is supposed to be so safe, loses over 10% of its value in less than 24 hours, the consequences will be dire.. The market value of the currency was about 43 billion dollars yesterday evening and now it stands at less than 37 billion dollars.
The collapse in the peg of the currency came after the company responsible for issuing the currency – Circle, announced that Silicon Valley Bank is one of six banking entities that are used by the company to manage the part of the cash that backs the reserves of the stable currency (about 25% of all the assets that back it) . The company said that it is waiting for clarifications from the bank and the authorities but tried to reassure and said that the company and the currency will continue to operate as usual.
Following the company’s announcement and the state of the currency, the largest exchange in the world – Binance, announced that it will no longer allow conversions between USDC and its stable currency (BUSD). Binance said this is a normal risk management step by the company while it assesses the situation.
Silicon Valley Bank’s downfall happened over the past week, with the company’s stock losing 60% of its value on Thursday and then halting trading after coming close to losing 60% in Friday’s open. Yesterday it was announced that the bank is in talks to sell itself after failing to raise capital and that there is concern about the funds in the bank’s deposits. Silicon Valley Bank is a major source of funding and deposits for startups and many companies that are expected to be affected by the situation and it seems that the crypto industry is no exception.
This is not the first time that a “stable” coin has lost its peg, the last time it happened on such a scale the coin completely lost its value, it is of course Terra Luna’s UST coin. UST was one of the best known and largest coins in the crypto world until the middle of last year. The peg of the currency to the dollar worked algorithmically, by using another currency of the Terra Luna project, and in the end, following a drop in the price of Bitcoin (which was a significant factor in maintaining the stability of the currency) the peg disappeared, investor confidence evaporated and about 50 billion dollars disappeared from the crypto market in less meaning.
The Terra Luna event was one of the most significant events in the crypto world, both in 2022 and in general, and it was probably one of the factors that ultimately led to the collapse of the FTX exchange towards the end of the year. It is impossible to know where the current event will end, but it is clear that in the coming weeks we will hear a lot more about the ripples it created. Meanwhile, the other currencies are in a mixed trend – Bitcoin rises slightly to a price of $20,500, BNB (the other currency of the Binance exchange) jumps by 8% to a price of $300, Polygon, Solana and Polkadot lose more than 2.5%.
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