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USDC Event Reanalysis: The End of the FUD, the beginning of the second half of the bear market

0xLoki

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The end of Circle will be the beginning of a new liquidity dry up and a new round of licensing in crypto markets.

原文标题：《 USDC 事件分析（二）：FUD 的终点，熊市下半场的起点》

Original article by lokiz.eth

One, wait for the next licensing

USDC has made detailed information disclosure today, the core contents include:

1) Circle's funds in SVB are already in the transfer sequence, and according to FDIC rules, the transfer should be completed next Monday.

2) It is still possible that the money cannot be received, but even so, it only takes time to recover or part of the money, not all the loss.

3) Even if the above happens, Circle has the ability to cover the loss and guarantee 1:1 exchange.

4) Of the remaining cash deposits, $5.4 billion is in BNY Melon and $1 billion is in Customers Bank

None of this new information is bad news, BNY Melon was in the low risk category in the previous analysis, Customers Bank was in the medium risk category, and with a high probability of 3.3 billion in SVBS, Circle is well placed to fill the gap even if extreme circumstances occur. If the above information is true, USDC does not have any risk of insolvency.

The market is always right, and 0.96 is a very comfortable price at this point in time because it happens to be the point in time when the first phase of the Circle-SvB-driven investment opportunity has ended and the logic of this phase of betting is ** [Is USDC solvent at all?] **

Circle

It is said that Depu is very similar to the stir-fry currency. The position of Depu inside is very important, and so it is in this case. According to the previous analysis, the reasonable price of USDC is between 0.895 and 1.000. If you convert USDC at 1.00 (or 0.99), you will get a very good position, but if you buy USDC at 0.98, you will get a very bad position. This can have a big impact on what you do next.

And now the current USDC price has risen from the lowest 0.88 yesterday to around 0.96. This price at this event node gives everyone a chance to exit, whether long or short, whether positive or negative, is now an acceptable exit point. Quit, then wait for the next good position, then bet (or not).

It can be seen that the market's confidence has increased significantly, and the pricing of USDC has also entered a reasonable range. But the 0.04U difference means there are still concerns in the market, some of which are mainly concerns about a run on USDC. So the core question of the second round is ** [Will there be a run? What happens if there is a run?] **

What happens on Tuesday and next Monday?

The price action of USDC may be variable, but what happens next week is almost certain:

** The first inevitable event is that Circle will open the redemption channel. ** Two reasons. The first is that all information of Circle points to this point. Circle has the ability to guarantee 1:1 full payment. The second is that Circle has enough liquidity to do so. Even considering only the funds of BNY Melon and Customers Bank, Circle has 6.4 billion in cash and 100% solvency. On the premise that there is no fund gap, open payment is the fastest way to return the currency price to stability and eliminate FUD.

** The second inevitable event is that there will be a lot of redemptions (you might call it a run). The demand for a ** run includes two aspects: (1) arbitrage demand. As long as the USDC does not return to 1U, arbitrage opportunities will exist. (2) hedging demand. The USDC was converted into fiat currency because of concerns about systemic risk to the USDC and Bank of America.

Then, under the premise that Circle is open to redemption, institutions or users with arbitrage ability will continuously redeem self-held USdcs and those purchased in the secondary market. These arbitrages would push up the price of USdcs and reduce the spread.

If things go well, Circle will lose some of its USDC launch size in return for price stability and confidence in the USDC, with the USDC going back up to 0.99 or 1.00 (probably 0.99 because confidence doesn't turn around overnight).

Of course, there are some (albeit rare) bad scenarios, such as excessive redemptions on the first day that slow or halt redemptions, and financial market volatility that causes further panic. In this case, the USDC price will fall again after rising, but I still think it will eventually return to 0.99/1.00 for the simple reason that redemptions may slow down, but not be suspended, because Circle has a 1:1 redemption capacity.

By the way, CZ has repeatedly criticized the unreliability of the bank in recent days, but BUSD only has 600 million funds kept in the bank, and Silvergate is included in the partners (does not mean there is money in Silvergate). And Circle is 11.1 billion, and the fact that it's Circle that's in trouble, but it's just survivor bias, and Circle's plan is fine. From this perspective, it is ironic that the USDC has exploded while other more centralized or opaque stablecoins have survived.

Circle

The third certainty is that the USDC will not be redeemed in full. Two reasons. First, with the opening of the redemption channel of Circle and the return anchor of USDC, market confidence will gradually increase. The second point is that USdcs still have many passive holding needs, such as Maker's PSM module, cross-chain bridge locked assets, assets to be cleared (such as FTX, Voyager), dydx contract locked assets. It takes a certain amount of time for these USdcs to exit, and they will not exit immediately at the moment of opening. The total amounts to well over $3.3 billion. It is impossible to judge how long the redemptions will last and how much they will be. My personal opinion is 10% to 30% of the total issuance, or 4 to 12 billion yuan.

So I prefer to call what's going to happen on Monday a massive redemption rather than a run, because the premise of a run is that you don't have enough reserves, or you withdraw more than you have reserves, which is not the case for Circle.

Wednesday, Monday starts optimistic, Tuesday starts pessimistic

While the USDC is likely to return to 1.00/0.99 soon and the risk of a Circle explosion is almost zero, the impact on the rest of the market is just beginning.

The first impact is on market liquidity. Even if the USDC anchors back soon, this process will bring a lot of USDC outflows, while the fear and safe-haven demand will not go away, and it is possible that the various stablecoins, including the USDC, will continue to drain in the coming months. At a time when the market is already extremely illiquid, the outflow of stablecoin will worsen the already poor market.

The second is a one-two punch to markets. For users, the USDC incident will increase their distrust of the crypto ecosystem, outside the circle of money to wait and see intensified. For project parties and VCS, they need to face more complex custody issues and higher costs, panic also leads them to seek more liquid portfolios (e.g., fewer Alts, more BTCS and fiat currency), while pessimism makes everyone (tier 1 and Tier 2) more cautious. In addition, there are many projects with strong ties to the USDC itself (such as Maker/Frax) that will be hit more directly.

The third is the market level of regulation and compliance. [Fake] good student FTX has a problem. [real] good student Circle is now in trouble. What is the next step for supervision and users to tell the great vision of compliance?

The end of the Circle event will be the beginning of a new round of liquidity drying up, the crypto market will also start a new round of licensing, and then all you need to do is to get a good hand, or a good position.

Welcome to the second half of the bear market.