The failure of Silicon Valley Bank (SVB) has sparked fears of contagion throughout the U.S. and global economies. Monday the 13th will initiate a pressure-packed week of trading. While the normie markets work slowly and are closed over the weekend, cryptocurrency works faster. Circle’s USDC stablecoin felt an immediate impact thanks to SVB’s collapse. According to the remarkably transparent Circle company communiqués, some $3B of Circle’s $44B in cash were locked within SVB’s lapsed ledger.
Since Circle backs USDC 1:1 with cash or U.S. treasuries, crypto traders across the world got spooked. A rash of selling pressure destabilized the ‘world’s safest stablecoin.’ At its worst, USDC fell to $0.88. This depegging incident lasted the bulk of Saturday but has since been resolved. On Sunday the Fed issued a statement saying they would guarantee all deposits in affected banks.
100% of USDC reserves are also safe and secure, and we will complete our transfer for remaining SVB cash to BNY Mellon.— Jeremy Allaire (@jerallaire) March 12, 2023
As previously shared, liquidity operations for USDC will resume at banking open tomorrow morning.
While the bank run contagion is spreading to other banks, like the now closed Signature bank, or the faltering First Republic bank, this Fiat crisis is seemingly good for BTC and Eth. Markets for the top two cryptocurrencies have rallied since Saturday. It seems like the depegging incident encouraged crypto enthusiasts to swap stablecoins for BTC and Ethereum. In contrast, First Republic bank’s stock (ticker FRC) has fallen like a shitcoin stone. This bank run is a good example of why self-custody and decentralization are far superior to centralized systems.
First Republic Bank's stock crashed like a shitcoin (via TradingView)
It wasn’t that long ago when the FTX crisis demonstrated why centralized systems are always vulnerable. Putting one’s trust in a single actor is never safe. SVB and Signature Bank, just like FTX, failed to manage risk and then failed to cover user withdrawals. The big difference between banks and Bankman-Fried’s business (besides FTX’s shady rehypothecation of depositor funds), is the U.S. Federal Reserve’s presence guaranteeing depositors funds despite SVB and Signature’s failures. And while this Fed backing absolutely makes holding Fiat less risky than crypto, it is important to note that there is uncertainty with Fiscal Policy, and a practical guarantee of inflation for all Fiat currencies.
In the face of the Fed’s guarantee of deposits within SVB and Signature, the U.S. Dollar started trading down in Forex markets, Monday. Despite the Fed’s efforts to tame inflation since late 2021, the Dollar has inflated by well over 6% for the last 18 months. For those that want low-risk investments, U.S. Treasury Bonds have “ballooned” to just under 5%. While that’s a nice rate of return, it is still lower than the inflation rate. In other words, holding cash or T-Bills is a sure way to lose purchasing power over time.
Whether you trust the intentions of Central banks or not, it is clear that the global economy is mercurial and volatile. No one, no matter their expertise, is able to predict what will happen and how to properly preempt economic crises. Human error is always a major factor—it is built into centralized systems run by bankers' decrees. In contrast, the programmatically fixed supply of cryptocurrencies like Bitcoin and Ethereum stand as a counter to government-issued money. In the long run, fiat will inflate, crypto will deflate (or at least keep a steady supply). If one zooms out far enough, despite the temporary volatility within crypto markets, long-term hodling of BTC and Eth seem like a far-superior savings asset when compared to cash.