|March 13, 2023||View Online|
It was a wild weekend to say the least...
Silicon Valley Bank collapsed after a bank run while USDC lost its peg amidst the chaos. We've got all that and more in today's newsletter.
Let's dive in!
Silicon Valley Bank Collapses
We got a little blast from the past this weekend with news that a large US bank has collapsed.
No, not Lehman Brothers but every tech bro's favorite vault: Silicon Valley Bank (SVB).
How did this happen?
COVID-19 and the Fed...
During the pandemic, the tech sector experienced a period of growth, leading to an increase in deposits in 2021. In one year, bank deposits grew around 3x with venture capital flowing and tech bros building-sunny times in paradise.
SVB, looking to earn some yield on their newfound capital, decided to invest and put a good chunk of change into 10-year bonds with a yield of 1.79%.
This wasn't a high-risk endeavor at the time as Jerome Powell and the Fed were persistent that inflation was "transitory." Although the economy was heating up, there was no sign of rate hikes on the horizon.
Once rates started rising through the roof to combat inflation, the value of the bonds began to plummet, leaving SVB with billions in unrealized losses.
SVB then revealed on March 8th that it planned to recoup its losses by selling more than US$21 billion of investments, borrowing US$15 billion, and initiating an emergency stock sale to raise US$2.25 billion.
This message caused a bank run for the ages, with $42 billion in withdrawal requests being submitted that day and SVB officially collapsing after 40 years in business.
Fed to the rescue
After a weekend of mayhem, confusion and fear, the Treasury, Federal Reserve, and FDIC joined forces (kind of like the Avengers) to announce on Sunday at 6:15 pm EST that "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer" and all customer deposits will be available this morning.
Bailouts? Is America going socialist on us?
The announcement clearly states that "Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed."
So although depositors will be made whole, SVB shareholders still get a punch in the face from the cold hand of the open market.
And how did the crypto market react?
Just like you'd expect...
Bitcoin (and the rest of the crypto market) rocketed up on the bailout news and is now trading roughly where it was pre-SVB collapse.
USDC loses its peg
We all enjoy the decentralized aspects of crypto...
Permissionless transactions, non-custodial trading, and even lending and borrowing.
But one centralized plug-in keeps the whole system afloat:
The $130B market of stablecoins.
And after news broke that Circle (the parent company behind USDC) had funds deposited in SVB, worries about stablecoins and USDC went into overdrive.
Were any reserves left, or is the backing behind the second-largest stablecoin in the market gone?
Watch out below
Amidst the confusion, USDC lost its peg and traded as low as $0.88 per CoinMarketCap.
DAI, a decentralized stablecoin issued by MakerDAO, fell even further to $0.80 as the market learned that ⅓ of its reserves are held in USDC, also showing a decent amount of SVB exposure.
Thankfully though, Circle came forward to announce that only $3.3B of their $40B treasury was held at SVB and that USDC would continue to operate and trade as usual while waiting on further news.
Traders reacted positively to this news bringing trading of the stablecoins back into the mid-ninety cents range.
To wrap it up, after the Fed announcement mentioned above, it became clear that Circle would be able to access all $3.3B in SVB funds. Both DAI and USDC have since shot right back up to within $0.01 of USD parity.
What a series of events!
Although this crisis was avoided, many crypto users are beginning to question if there is a better way to trade dollars on-chain without so much exposure to the current financial system.
What else is sprouting
That's it for today!
Hope you have a great Monday and we'll catch you in your inbox tomorrow 👋