Silicon Valley Bank’s Failure Could Disrupt Stablecoin Market and Reduce Supply

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Silicon Valley Bank’s recent bank run and subsequent regulatory intervention have brought to light the potential impact of traditional banking institutions on the broader cryptocurrency ecosystem. At its peak, the reduction in stablecoin supply was 1.9 billion, with investors abandoning the asset they typically view as a safe haven. Even after the situation stabilized with regulatory intervention, the stablecoin supply still witnessed a net decrease of 0.9 billion between March 7 and March 13.

The crisis had a significant impact on Circle’s USD Coin (USDC) stablecoin, with $3.3 billion of its reserves remaining with Silicon Valley Bank during the crisis. This caused USDC’s price to depeg and led to a net outflow of 1.90 billion, or a 4.4% decrease in supply overnight. Although US regulators intervened to backstop affected institutions, USDC still saw a 9.1% drop in supply, with a net outflow of 3.93 billion by March 13.

Despite the market turbulence caused by the Silicon Valley Bank crisis, certain stablecoins experienced significant supply growth. TrueUSD (TUSD) and Dai (DAI) both saw substantial net inflows of 57.4% and 27.4%, respectively, while Tether (USDT) and Frax (FRAX) recorded smaller supply growth rates of 1.3% and 0.1%.

The methodology used for this analysis involved analyzing changes in supply for the six largest stablecoins based on market capitalization. Data was obtained from CoinGecko and covered the period of March 10 to March 13, 2023.

Prior to its shutdown, Silicon Valley Bank faced a massive $42 billion in withdrawals within just 48 hours. The bank had invested in long-dated treasury bills to generate higher interest income, but increasing withdrawals and rising interest rates forced the bank to sell off its $21 billion bond portfolio at a $1.8 billion loss. The bank’s attempt to raise $2.25 billion through equity to cover the losses backfired and led to speculation among startups and venture capitalists, prompting the FDIC to intervene and place the bank under receivership.

This event highlights the potential impact of traditional banking institutions on the cryptocurrency ecosystem and serves as a reminder that stablecoins, while viewed as a safe haven by investors, are not immune to external shocks. The analysis of stablecoin supply changes during this period provides valuable insights into the behavior of investors and the resilience of certain stablecoins in times of crisis.

In conclusion, the Silicon Valley Bank crisis serves as a warning to investors and the broader cryptocurrency community that traditional banking institutions can significantly impact the stability of the cryptocurrency ecosystem. It is crucial to monitor and analyze such events to understand the impact on stablecoins and other digital assets.

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