After we took a hit on Silvergate, I thought that the banking crisis in crypto had come to a conclusion. And it has, for the most part.
However, a wider crisis has emerged within the Main St. banking system, or at least the Silicon Valley ecosystem, with Silicon Valley Bank (SVB) imploding in a shockingly rapid fashion, having been taken over by the FDIC headed into the weekend.
Circle, the issuer behind the USDC stablecoin disclosed having approximately $3.8 billion of funds in the bank, which they tried to wire out Thursday night – but had not been processed before the bank shut down.
Those funds are now trapped.
This set off a panic, which USDC de-pegging from it’s 1:1 backing with USDC, dropping as low as 0.82 overnight.
When I woke up this morning and had a bunch of messages and research from our re
searcher Jon, @VamosSocios71 (he lives in the UK, which is 6 hours in the future), my first reaction was “!@#*”.
Personally, I’ve got a decent amount of USDC which looked to be worth about 90 cents on the dollar before I even got my first coffee.
Jon found a few datapoints outlining the extent – and because the situation is unfolding so fast, I want to get this note out and don’t have a ton of time to format it, etc.
The main points are this:
- Circle has $3.8 B trapped in SVB against a total issuance of $40 billion in assets and something like $11 billion in cash.
- SVB is under conservatorship and apparently all FDIC insured balances will be paid out monday morning, with non-insured balances receiving an initial dividend.
- It looks like there will be some sort of intervention or eventual sale to recapitalize SVB
- The remainder of Circle’s funds are safely elsewhere (unless the banking crisis expands).
- The worst case for Circle’s USDC is a floor around 0.77 (23% loss)
Against this backdrop, there is some major panic occurring: People are cashing out USDC to move it into Tether of all places (this is in my mind, even riskier than standing pat in USDT):
So far I’ve seen at least one other alert this morning from a “crypto guru” saying that Circle is collapsing and to move your funds out immediately
This assessment is “not even wrong” as the physicist Wolfgang Pauli once lamented when confronted with some particularly flawed reasoning. The Circle depeg has nothing to do with Silvergate Bank and everything to do with SVB (and SVB’s collapse had nothing to do with Silvergate, either).
This is the second time (at least) that this specific person pronounced the imminent demise of Circle.
What’s The Play Here?
If you’re holding funds in USDC, it’s probably supposed to be your dry powder, not a trade – so that puts a different timbre on it.
Once I realized that the floor was 0.77, worst case, and that USDC had already bounced pretty hard off the 0.82 low, my hunch is that USDC is on the way to re-pegging and not “headed for zero”.
In fact as I was sipping my coffee over breakfast it appeared as a “maximum pessimism” trade was forming around a USDC re-pegging thesis and hedge funds and traders were stepping in for levered long plays ( good breakdown here):
I found some USDT sitting around in my ByBit account and had the fastest double of my investing career, about 75 minutes (screen cap here was from about 15 minutes in)
This was piling into the USDCUSDT derivative at 50X leverage.
USDC is currently trading in the 0.9371 to 0.9362 range and I think this is tradable all the way up to 0.96 or even parity if you want to live dangerously.
ACTION STEPS:
- If you are holding capital in USDC – it is probably going to be ok.
- If you are nervous about it and need to move it, do not move into USDT (Tether), or BUSD (Binance USD) – as we have been waiting for the shoe to drop on one or both of those for months now and Binance is under even more heat.
- If you have to stay in the crypto world, then the DAI algorithmic stablecoin is about the only thing I can think of now. Not my preferred choice but in a “hair-on-fire” situation, will do.
- Alternatively – come back into the legacy banking system provided we aren’t in the early innings of a wider banking crisis.
- Finally – you could just roll it into Bitcoin, since you’d be getting a decent price on it. I know my USDC stash was there waiting for lower BTC prices, maybe that will still happen, but for awhile there it felt like I’d missed it.
The Maximum Pessimism Play:
WARNING (and this is important): do not, do not, DO NOT try this with capital you are trying to preserve (like your stash of USDC you were counting on for the future) – and only do this with what I call “back of the fridge crypto”, stuff you have lying around on exchanges as residuals, or by putting in highly speculative funds that expect to lose 100%:
Go into highly levered USDC long trades, either as futures or perpetuals and watch it like a hawk. From the time I started this email I’ve exited my trade once, after it dropped from 102% gain to 75% – and then rolled it back in (currently at 40% gain).
This is not value investing, this is not set-and-forget, this is an active, hairy play that you shouldn’t take your eyes off, even for a minute.
Watch each trade and if you’re down 10% or 20%, exit and stand back for a re-entry.
If you’re up 75% to over 100%, and it starts to drop 20% to 25% exit, take profits, and look at rolling back in on the next leg up.
But I don’t think USDC is going to zero (I don’t think it can go to zero).
The mid-month update should be out this week, I’m in March-Break mode so give or take a day. We’re also working on a post-mortem for Silvergate, even though it was dropped from the portfolio and we should have exited at the month-end letter (I forgot, tbh, so my shares are a zero).
Sincerely,
Mark E. Jeftovic
