USDC Fair Value — Post Peg Break
Stable Stable on the Wall, Do you have any collateral left at all?
This article has been written with the intention of providing information on the current macro events that have led to USDC peg break, as well as to provide rough calculations on how much further devaluation can happen. Do not treat this as financial advice and please do your own research.
As many of the readers might already be aware, USDC price is trading below its stated $1 peg. As I write, it is being priced at $0.90 which is a full 10% below its stated peg. The USDC fall has also impacted every other stablecoin as well expect Tether and BUSD. Even DAI, the decentralized collateral backed stablecoin has been impacted, coz much of its collateral was in USDC.
So lets have a look at the events from last few months, that have culminated in this peg break and lets try to put a floor on how much lower USDC can go.
Introducing SVB — Silicon Valley Bank
While most of the crypto problems of late have shared their links with SBF (Sam Bankman-Fried, FTX Founder), our current USDC problem, bucks the trend somewhat and finds itself tied with SBV instead — Silicon Valley Bank.
In case you missed the news, Silicon Valley Bank, a 40-year-old institution based in Santa Clara, California, faced a bank run and collapsed on Friday 10 March 2023. The bank’s failure is the second-largest in U.S. history, and the largest since the financial crisis of 2008, and nearly $175 Bn of customer deposits are now under custody of Federal Deposit Insurance Corporation, which has taken over the bank. Before it failed, SVB was the 16th biggest bank in the US.
Why is this important?
Because USDC Issuer, Circle, held $3.3bn of its cash with SVB. These holdings were part of the collateral that backed USDC stablecoin.
Why SVB Failed & Who’s Next
The reason why SVB failed can be stated in 2 simple words : Rising Rates.
When banks take money from depositors for safekeeping, they retain only a small portion of the money with themselves while lending out the rest as loans and debt to government and corporates. This way they get to earn interest (also called yield) on depositors’ money from the borrowers. A lot of this money also goes towards buying government and commercial bonds as they are some of the most liquid and easy to trade ‘loans’. Every bank does this and SVB was doing the same.
So What Broke?
Financial math dictates that when interest rates go up, the value of the government and commercial bonds comes down. So as the Federal Reserve started raising rates in 2021, the value of SVB bond holdings started coming off.
What it means is this :
SVB took depositors money and with it, they bought corporate and govt. bonds. As Federal Reserve stated raising the rates, the value of the bond portfolio started coming off.
And here’s the kicker — every bank has done the same. It’s just that SVB’s risk management was worse than the rest.
SVB was one of the most shorted stock in the stock market prior to going under. Now, the stock market has started shorting its peers. Here’s a great article that gives out more financial details for the interested :
Lets Circle Back to USDC
So that was about the Silicon Valley Bank (and surely many more). Now lets talk about what Circle, the issuer of USDC did with the depositors money - or more accurately termed as collateral against which USDC tokens are issued. Here is the latest available report issued by Circle on its holdings : USDC Reserve Report (holdings as of 31 Jan 2023).
The Good :
- The Fair Value of Assets was greater than the USDC in circulation ($42.33B vs $42.28Bn)
- The breakup of these Fair Value Assets was as follows :
- Liquid Cash in Banks : $8.7 Bn
- Assets in US Treasuries : $33.6 Bn
The Bad :
- Of the liquid cash, $3.3 Bn were with SVB and are likely locked (or lost) until the bankruptcy proceedings are complete
The Ugly :
- Circle also has cash and assets with other banks who may be considered as peers to SVB.
- One of these banks is also Silvergate which is also in process of winding down its operations.
Calculating The Fair Value of USDC post SVB
You may use this methodology to do the same for any other stablecoin of your choosing as well.
Any stablecoin can be valued with this simple framework:
1 . Calculate the value of total coins issued -> A
2. Calculate the value of total collateral assets -> B
Then, Fair Value of Stablecoin = B divided by A
In simple terms, if there are 10Bn stablecoins issued, but there are only $9Bn in treasury assets, then the fair value of each stable coin is only $0.9
So lets calculate the terms A and B for USDC post SVB. As per the Reserve Report, the USDC token in circulation are 42.288Bn. Hence, A = 42.288 Bn
Calculating the value of collateral assets, B, can be a little cumbersome, but its still straightforward. B comprises of :
- B1 — Cash Holdings
- B2 — Treasury Holdings
Lets calculate these separately and add them up to get the total value of B.
Cash (B1) : As per the report, as of Jan 31, Circle held $8.7Bn in cash. Circle has declared that $3.3Bn were held at SVB when it went under. Hence, assuming no major changes, we can estimate Circle’s liquid cash reserves at $5.4Bn (that is 8.7 minus 3.3 )
B1 = $5.4Bn
Treasury (B2) : As per the report, as of Jan 31, Circle held $33.6Bn in short term treasuries. Now to estimate how much the value of these treasury holdings might have changed due to changing interest rates, we can take a look at how a similar Bond ETF has performed since Jan 31.
The reserve report shows that all of the Treasury holdings were of ultra-short term bonds (ie with ‘maturity’ 1-3months). The BIL (SPDR Bloomberg 1–3 Month T-Bill ETF) fits this profile.
Note: If the stablecoin you are valuing has a more complicated treasury holding structure, you find the corresponding maturity ETF from this link here. Between tickers BIL, SHY, IEF, TLT you should be all covered.
Now lets lookup this ticker on TradingView website. Since Jan 31, BIL has dropped 1.8% in value. Hence, we can assume the treasury holdings of Circle would have done something similar.
Hence, we may calculate,
B2 = $33.6Bn * (1–1.8%) = $ 33Bn
Therefore, total value of collateral assets,
B = B1 + B2 = $38.4 Bn
Hence, Fair Value of USDC = B div by A = $38.4Bn / 42.3Bn tokens
Fair Value of USDC = $ 0.908
Key Points of Note : I repeat, this is not financial advice and please do your own research. The above math has been performed given the latest available information that the author could look up from trusted sources. If Circle had meaningfully changed its holding profile significantly from the last published data, then the fair value could be much different.
