Is USDC on the brink of collapse and what could happen if this is true?
After the harsh weeks the crypto market has been through, investors are 24/7 alert on what could be the next piece on the domino to fall. After Luna, 3AC, Babel, and Celsius were already distrusted by the market, BlockFi and Voyager were about to be the next ones, but big players such as FTX were involved in preventing this from happening.
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But one thing that could really be a red alert on the market is the possibility of major stablecoins depegging, especially USDC, which is considered one of the safest and most reliable of the sector. And last week, a Twitter thread claiming that Circle’s USDC could be on the brink of collapse brought a buzz to the crypto community.
How does USDC work?
The USD Coin is backed by two of the most significant companies in the crypto sector: Circle and Coinbase, which are heavily invested in staying compliant with global regulators.
For this stablecoin, if you buy one USD Coin using fiat currency, then that fiat currency is stored as one USD, and a new USDC is minted. If you sell USDC for fiat (USD), the stablecoin is burned while the fiat is transferred back to your bank account.
What are the rumors of bankruptcy based on?
A Twitter thread by @CryptoInsider23 says Circle is constantly losing money since the company has been raising money twice per year for the last years to pay for the ~5% incentives they offered.
According to Gerald Davidson’s (@CryptoInsider23) analysis on Twitter, Circle has already lost $500 million in the first quarter of 2022 and is on track to losing a total of $1.5 billion in the year.
And theoretically, USDC is now lent to high-risk lenders, such as Genesis, BlockFi, Celsius, Galaxy, Alameda, and 3AC. If this list is accurate, it comprises the companies mentioned at the beginning of our newsletter, which already collapsed or are about to do so.
What was Circle’s response?
Jeremy Allaire, the CEO of Circle, has quickly responded to CryptoInsider23’s allegations and claimed that “Circle is in the strongest position it has ever been in financially”, and that they would continue to increase their transparency.
He has also shared Circle’s most recent reports on his thread, which are worth taking a look at if you want to understand in detail the stablecoin works:
- USDC transparency and trust;
- How to Build Trust — USDC Audits and Attestations;
- USDC Trust and Transparency — Liquidity Matters.
What should you, as an investor, do?
After seeing what happened with UST holders, that had the stablecoin in their portfolio as their cash allocation or the “safest” holding to avoid high volatility, I assume no one wants to experience what is seeing their savings get down 90%-100%.
If USDC collapses, this would have a major impact and bring a wave of distrust in the crypto market as a whole, so it’s worth keeping an eye out on this matter.
Although the USDC thread might be merely FUD (fear, uncertainty, and doubt), the safest thing to do now is:
- to get your stable assets to USD or other fiat currencies
- to move your crypto assets from lending platforms to a cold storage — such as Ledger — and be patient until the turmoil ends.
Joe Robert is currently the Chief Executive Officer of Robert Ventures, with over 20 years of asset management experience. Since he started Joe has created predictable double-digit returns for investors & Partners. Joe has invested in seed rounds with equity and tokens, along with a portfolio of Bitcoin, Ethereum, and other top cryptocurrencies.
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