The USDC instability caused a domino effect on other stablecoins, leading to the depegging of DAI, USDD, and FRAX from the U.S. dollar.
This happened after Circle, the issuer of USDC, revealed that it could not withdraw $3.3 billion of its $40 billion reserves from Silicon Valley Bank (SVB), causing USDC to depeg from the dollar.
A Circle spokesperson said late Friday that SVB was one of the six banks that the firm used “for managing the approximately 25% portion of USDC reserves held in cash.”
DAI, a stablecoin issued by MakerDAO, lost 7.4% of its value due to USDC’s depegging. USDC represented 51.87% of DAI’s collateral, worth $4.42 billion.
Other stablecoins, including USD Digital (USDD) and fractional-algorithmic stablecoin Frax (FRAX), also depegged due to adverse market sentiments.
USDD dropped nearly 7.5% to trade at $0.925, while FRAX dipped even further to $0.885.
The sell-off was not limited to just these three stablecoins either, as other popular cryptocurrencies like Ether (ETH) tickers down $1,445 and Pax Dollar (USDP) also experienced sharp drops in value.
These events have highlighted the fragility of the stablecoin ecosystem and have prompted many to question their viability as a store of value.
Despite these concerns, other popular cryptocurrencies like Tether (USDT) tickers down $1.01 and Binance USD (BUSD) tickers down $1.00 continue to maintain a 1:1 peg with the U.S. dollar and remain reliable stores of value for traders and investors alike.
The depegging ordeal started after Circle announced that $3.3 billion of its funds were not processed for withdrawal by SVB.
It is worth noting that SVB has since been shut down by the California Department of Financial Protection and Innovation, with the Federal Deposit Insurance Corporation being appointed as the receiver to protect insured deposits.
Traders bet on USDC recovery
As uncertainty continues to reign over the cryptocurrency market, traders and investors may have fled to other stablecoins to protect their capital.
USD Coin (USDC) is continuing to struggle, trading at under 90 cents and hitting lifetime lows.
Some traders have bet on a gradual recovery to the $1 mark, buying the relatively cheap USDC for a potential 10% gain should the tokens repeg to the intended dollar mark.
Futures funding rates on the crypto exchange Bybit jumped to as much as 0.3% on Saturday morning, meaning traders made as much as 0.3% in fees from their total market position. This funding was paid by traders who shorted USDC, paying over 0.4% to borrow the asset and bet on lower prices.
USDC futures worth $4 million were liquidated in the past 24 hours.
Either way, it will be interesting to see how this story unfolds in the coming days and weeks as more details about Circle’s exposure to Silicon Valley Bank emerge.