I think on Thursday, SVB saw cash outflow requests over $40b in one day. USDC peg is so far below 1 right now there will definitely be a lot of par arbitrage Monday trying to withdraw.
Hopefully it doesn’t take longer than a day for them to settle treasury trades, and maybe some people have lost the keys to their crypto. They could also possibly have a line of credit with instant settlement assuming they’re truly solvent with marketable securities at market prices.
3 month (or less) Treasury Bills are damn close to cash. I don't believe they lose value in practice, not even in the rapidly raising interest rate environment of the last year.
The problem at Silvergate and Silicon Valley Banks is that they bought 10 year or 30 year bonds, not 3 month bills. Its a completely different composition, with completely different properties.
The assets in their HTM portfolio did not all appear in March 2021 and it appears most of it was in various (C)MBS which likely paid a few bp more than comparable maturity treasuries. Unfortunately, the duration (sensitivity to change in interest rates) of mortgages extends in an increasing rate environment (less people prepaying) and so the portfolio probably lost a little bit more than comparable treasuries.
No that's not it. You can sell the bonds any time. But now they're worth considerably less because interest rates are much higher now. They locked themselves in at rate that are now terrible for 10 years.
No, rvnx is correct. SVB held many of these assets as "hold to maturity" assets. Point being, if all of their customers didn't need to withdraw their money, then SVB would have been fine, as they could have safely held these assets to maturity and then redeemed them for full face value.
The problem is that just when their long duration bonds lost value is also when their startup-heavy customer base needed their money out for expenses, and with VC funding dried up they weren't getting new deposits. SVB's problem was that their liquidity issue became a solvency issue when it became public that they were forced to sell their long duration bonds at a steep loss to cover withdrawals.
> No, rvnx is correct. SVB held many of these assets as "hold to maturity" assets.
He is wrong. This is just an accounting term / treatment. You can still sell them, and will obviously recognize the loss when you do. Had they been 3 month bonds, they could have been sold for basically full value and remained solvent.
Yeah, obviously the bank would have no problem if there were no bank run. But the reason there was a bank run was because the didn't have money because they locked their funds into bonds that subsequently lost all of their value.
Whether they were "held to maturity" or not, the fact is that they lost value. Not that they were locked away for 10 years untouchably.
There are a significant amount of other banks that are in the same situation with respect to long term bonds that have lost a lot of their value due to rising rates.
The difference for many of them, compared to SVB, is that they have a much more diversified deposit base, so they don't have the same dynamic of the majority of their depositors all needing their money out due to VC funding drying up.
The fact that bonds lost value is really not an issue if they didn't need to liquidate them before maturity. After all, someone deposited $100, and SVB turned around and bought a bond for $100. If they were able to hold that bond to maturity, they would get $100 dollars back to make the depositor whole. The problem is that depositor wants their money back now while the bond is worth less than par value.
> After all, someone deposited $100, and SVB turned around and bought a bond for $100. If they were able to hold that bond to maturity, they would get $100 dollars back to make the depositor whole.
No. In your example, someone deposited $80 and SVB turned around and bought a bond for $80. In 10 years, that bond will be almost certainly be worth about $100. Because it’s reliable, theu can use that value for some of their long-view bookkeeping and projections, but it’s still an $80 asset purchased for $80 and worth $80.
Some months later, the market for those bonds starts to shift. That bond will still be worth $100 eventually, but now trades for only $70.
This puts SVB into a different risk position than they were previously. While their books still reflect a $100 asset in 10 years, they actually hold less value in assets now than they started with and are more vulnerable to a run than they were previously.
Where they could have immediately sold that $80 bond to meet an $80 obligation, they can now only sell it for $70. That’s a problem. It’s a bearable problem as long as nobody asks for too much money at the wrong time, but the fact that they’re so much more vulnerable invites people to do exactly that, in order to make sure they’re not caught as the last one out the door.
Yes, the bank could hold the bonds to maturity to get $100 back in 10 years. But that $100 dollars in the future is worth much less than having $100 now.
SVB depends on earning net positive amounts on their interest income to continue operating. Turning $100 into $100 10 years later is the same as turning $100 into $90 now (illustrative numbers. The issue is of course varying interest rates).
No, the problem was that VC's led and pushed for the panic withdraw of all funds.
The bank would have had no problem if it was just the case of fewer new deposits. As to expense draw downs, those would have been ongoing and part of normal business operation.
> No, the problem was that VC's led and pushed for the panic withdraw of all funds.
If you knew that your bank was insolvent, would you withdraw your funds before SHTF? Or would you twiddle your thumbs until everyone else did that, and your accounts got frozen, with you sweating bullets over whether or not you'll be taking a haircut on your deposits?
Would your withdrawal be a 'panic', or simply a rational decision to not be the moron left holding what might be an empty bag?
It was a panic becaaue they realized the bank was vulnerable and so their money was vulnerable. This wasn't an irrational panic, it was the kind of panic you experience when being chased by a bear.
But surely there's a high chance of rates rising and your collateral falling in value over a ten year duration?
It seems like madness to leave yourself totally exposed to a situation like this. Rates rise, your investments fall and your depositors want their money back doesn't sound beyond the realms of the imagination.
So weird to think that near-zero interest rates are the best you can do for the next 10 years. I'm pretty sure everyone way saying "lock in this low interest rate before they go up again!"
The creators of USDC could destroy their own coins to restore the 1:1 reserve peg. I doubt they'd do it, but it would immediately restore confidence.
Send them to a null address or commit to burning them in software. If they can restore the reserve, they could remint them.
I'm a crypto bear (with modest crypto holdings for diversification), and I think this is an opportunity for these folks to step up to the plate and show they can meet these sorts of challenges. If you can successfully navigate a bank collapse, then maybe you deserve a seat at the table. I'm not holding out my hopes for USDC though.
IMHO, they are justifiably confident that this will all blow over in a few days, and that their deposits will be available to them soon after, albeit with a few percent missing.
But I concur - they are showing their true colors by not defending the peg.
it's not their job to defend the peg on the open market (not to mention impossible by definition), their only product is the possibility to redeem each USDC for $1 through a circle account. We will see on Monday if they can deliver.
I’m not sure I follow. Circle don’t hold tens of billions of USDC: USDC is minted when they receive USD at a one-to-one ratio. What coins are you proposing they burn? If there’s $10bn USD missing they’d need to burn $10bn USDC.
> The creators of USDC could destroy their own coins to restore the 1:1 reserve peg. I doubt they'd do it, but it would immediately restore confidence.
Why should they? USDC is not an algorithmic stablecoin. For once, it's actually not a failure in crypto that lead to this depeg.
I'm not even sure they are allowed to do it by their own contracts with their clients as long as it is not clear that the USD at SBV is really lost.
There is no fee to covert USDC to USD. So as long as you buying USDC and depositing it into Circle is less than $1 per USDC you make profit. As long as you make profit it makes sense to arbitrage as much as you can.
that’s if you have a Circle account which effectively no individual has access to. if you convert USDC to USD on Coinbase or another exchange you’re paying the market rate
Coinbase actually does it 1:1 by proxy from Circle: you don't have to "trade" USDC-USD. They aren't right now, but they normally go above and beyond by being willing to do it on weekends, while Circle itself only operates on weekdays, and they don't want to stake their own fate towards that, so they said they are pausing doing that until Monday.
Do you have a source for that? It seems like it would generally be in Coinbase and Circle's best interest for people to arb USDC (at times when redemptions are live).
No, I don't mean that. CBP is fine for them, since they earn fees on it.
If you pull your funds off CB into a DEX and then do the arbitrage, that's when they get unhappy.
Yes, that's happened to someone I know. Their account was locked as soon as CB figured out that is what they were being used for. They don't like just being a fiat ramp since it doesn't earn them anything.
The arbitrage the comment was talking about would be done by people with Circle accounts. If you don't have an account it would be in your interest to sell your USDC for as close to $1 possible. This will inflate the value of USDC on the open market until Circle account holders start to fear that they will be holding the bag.
if major usdc holders who have a circle account were primarily concerned with tiny arbitrage plays they wouldn’t be holding a stablecoin earning zero yield when t-bills pay 5% to begin with
This isn't a tiny arbitrage play because you can repeatedly do it for as long as circle is liquid. Even if you don't hold a lot of USDC it's selling at a discount on the open market. If it goes into a full bankrun all circle accounts will be fighting over what share of the $43.5 billion reserves that they will get.
Yes, by creating a synthetic - you short BTC/USDC and long BTC/USD. This will create a USDC/USD synthetic. Both BTC/USDC and BTC/USD can offer up to 100x leverage, so the synthetic USDC will also be up to 100x. Of course, there is a long list of risks in such a trade, and if you need to ask about it it's not for you.
It seems like the point of that comment to look knowledgeable while providing no actionable information[2] and falsely implying it’s too difficult[1], so I’m guessing no, as that would defeat their seeming objectives in making the comment to begin with.
> I can't see this not returning to it's peg by the next news cycle. It's free money.
But isn't this the problem?
If over the weekend billions of dollars of USDC is purchased at less that $1 from people expecting to cash in on "free money" come Monday, Circle is going to have to be able to ensure that that actually happens, which could easily require more liquidity than remotely possible (edit: I just realized that Circle claims that back 1-to-1 with liquid assets).
Volume right now in USDC is at record highs. If all of those people are hoping to make free money on Monday, and it turns out Circle is unable to maintain that, then the entire USDC will crash almost instantly once people realize it's impossible to keep it pegged.
I'm far from a crypto expert so could you clarify what I'm missing?
> I'm far from a crypto expert so could you clarify what I'm missing?
USDC isn't an algorithmic stablecoin or backed by non-cash assets. It is a coin that is redeemable 1:1 for cash, always. They have approximately $40b in coins and is only "short" $3.3b. Right now the first 91% to redeem can still get a full dollar, not everyone who redeems gets 91 cents.
People who have no idea how it works are panic selling fearing a crash. Other people are buying up as much as they can because you're effectively selling someone a dollar bill for 95 cents, a deal I'd take every day.
> It is a coin that is redeemable 1:1 for cash, always.
That's what I realized after doing some more research. This is really a test of Circle's claims. If circle really has 1-1 liquid assets to cover all USDC, this is a non-issue and many people will make some very easy money after this weekend.
If, however, it's assets are not as liquid as claimed or not as 1-1 as claimed, then USDC and Circle will likely collapse Monday morning, quite possibly taking down Coinbase and much more with them.
The belief would be that USDC could repeg while being under collateralized. If there is enough holders of USDC who don't mind that and enough USDC locked up in various smart contacts, wallets with lost keys, or there being people who have missed the news, then Circle may have enough liquidity to continue operating USDC despite not having enough funds to cash out all USDC which technically exist.
I don't think you understand my question or the issue at hand, but I think I have found some answers.
It doesn't matter if it was already $1 right now. The assumption is that everyone purchasing USDC today when it was below $1 is planning on selling it Monday as a quick arbitrage.
Assuming the peg is restored by Monday, Circle is still going to have to have a lot of liquidity to meet the demands of a huge number of people trying to realize that $1. Again, today was the highest volume ever for USDC and presumably many of those transactions are people expecting to cash out Monday.
It seems very possible to me, that Circle will not be able to meet the liquidity demands of keeping the peg and fulfilling their promise of $1 USD for 1 USDC. If they falter at all, and the peg doesn't hold, then anyone holding will immediately panic and attempt to liquidate their position leading to a collapse.
The piece of the puzzle I was missing is that I didn't realize that Circle claims that they have cash reserves (cash and 30-day treasuries) equal to the entire USDC market cap. So anyone who trusts that Circle has the liquidity and cash on hand to payout everything views this as free money.
I would point out that this "arbitrage" existing for more than a brief moment implies there are lots of people who do not believe that Circle can meet these demands and are happily unloading their positions.
> I would point out that this "arbitrage" existing for more than a brief moment implies there are lots of people who do not believe that Circle can meet these demands and are happily unloading their positions
That is their promise, and I've ready previously that they do have some audits that verified it (unlike Tether, which used to make a similar claim).
However, another important question is what actually happens to that dollar - are they actually able to wire you that dollar if you hand them back 1 USDC? For 3.3bn of those dollars, we know they are not currently able to, since those 3.3bn are tied up in SVB, which isn't itself able to wire them to anyone. Hopefully, the rest of the them are more available, but it remains to be seen.
Most people trading USDC aren't creating/redeeming directly with Circle, they're transacting on an exchange where the price is simply determined by supply and demand.
Circle can only redeem during bank hours, so almost everybody involved maintains a buffer of easily accessible dollars to paper over. However in any sort of stressful time these buffers get used up. With no buffer to satisfy the 1USDC=1Dollar, redemptions stop until bank hours and there's no arbitrage opportunity.
For the most part nobody really cares if one of these buffers gets used up because you'll just hold USDC inventory for size. But when the solvency of USDC is in question, nobody wants to hold USDC inventory, and so there's no buying pressure for USDC below $1.
Another factor is that even if you think the USDC fair is .97, not .92, buying below .97 isn't necessarily a good trade. You might be last in line to do a 1-1 redemption, and by that time, the hole isn't $1bn on $40bn but $1bn on $5bn.
I understood your question and the issue perfectly well.
It's widely known that Circle backs USDC 1:1 with cash and cash equivalents. That's the value prop compared to Tether.
It doesn't have to be a huge mystery as to whether Circle can meet Monday liquidity demands. You could look at USDC trading volume since it de-pegged, set the buy/sell ration as you see fit - or even do some onchain analysis - then compare to Circle's cash reserves. This would be a worst case scenario.
Who is buying billions of dollars of USDC for $1 each and.. why are they doing this?
My understanding was that the entire point of a stablecoin was to smooth transactions between other crypto currencies, so most of the buying and selling of USDC was to convert between one coin and "USD" while still remaining in the crypto ecosystem.
The entire reason the peg can remain is because one company, Circle, is guaranteeing to purchase it for $1. If you want to cash out a small amount, sure you can go through a company like Coinbase but if you try to cash out billions then that will just force Coinbase to go to Circle in order to maintain their own liquidity.
You think USDC failing would be bigger than ETH failing? If ETH broke in a way it couldn't recover from I would think that is the second biggest domino (close to tied for first, even).
If you're right, then you can pick up some easy profits by buying USDC at a discount. The amount you're willing to commit is a good indicator of how confident you are in your assessment.
There is good chance that ~30% of deposits above 250k vanished. SVB really screwed up on trades. With equity at zero or close to zero, there is no backstop. Net present value of 2% securities that SVB loaded on is way below par.
Yes, and I have been, by accident! I borrowed USDC on Compound.finance a while ago, using wrapped bitcoin as collateral and the loan remains open. I was intending to just extract some equity from my BTC without selling it, not profit from crashes, but that effectively gives me a short position since I benefit from USDC being easier to buy and thus settle my debt.
Not easily that I know of, the best way would be to use a defi application like compound.finance. You can deposit usdc and take a loan against it in another currency. Then you repay the loan later. However, that is just a normal short. The only real way to lever this is to keep depositing the loan money, and taking out more loans which is expensive in terms of fees.
I think on Thursday, SVB saw cash outflow requests over $40b in one day. USDC peg is so far below 1 right now there will definitely be a lot of par arbitrage Monday trying to withdraw.
Hopefully it doesn’t take longer than a day for them to settle treasury trades, and maybe some people have lost the keys to their crypto. They could also possibly have a line of credit with instant settlement assuming they’re truly solvent with marketable securities at market prices.