The Depegging of Stablecoins
Stablecoins are cryptocurrencies whose value is backed or tied to a specific asset or a basket of assets. These coins typically have a stable value relative to a fiat currency, like the U.S. dollar, euro, etc.
Compared to the majority of cryptocurrencies that are very volatile, stablecoins offer a much safer and more stable value than Bitcoin or Ethereum. According to the website CoinMarketCap, the top 3 most essential stablecoins are $USDT, $USDC, and $BUSD, whose value tends to be around $1 as they are pegged to the U.S. dollar on a 1:1 ratio.
When the value of a stablecoin significantly detaches from its original or pegged value, this is called de-pegging, which can be caused by market conditions, liquidity issues, and/or regulatory changes.
On 10 March 2023, the stablecoin $USDC – a fully reserved-backed coin by United States treasuries – significantly deviated from its pegged value by dropping it to $0.87. This might not seem like much, but in a stablecoin it is a big deal. The $USDC price flooded because of the collapse of the Silicon Valley Bank, the 16th largest bank in the U.S. According to Circle, the $USDC issuers, $3.3 billion of the $40 billion $USDC reserves, were stuck in the Silicon Valley Bank.
As mentioned before, stablecoin de-pegging is a real thing. These crypto assets can de-peg due to micro and macroeconomic factors. The microeconomic factors to consider are shifts in market conditions, problems with liquidity, and modifications to the underlying collateral. On the other hand, the macroeconomic factors to consider involve changes in the economic landscape, like inflation or interest rates. Other important aspects are regulatory changes, as the government might ban stablecoins or smart contract flaws.
Although stablecoin de-pegging does not happen that often, it is still a genuine possibility, and the crash of $USDC in March 2023 made that very clear. The asset quality and risk management of these stablecoins are being questioned, and investors and traders are being advised to take a closer look at stablecoins.
Sources: cointelegraph.com, www.forbes.com
analyst opinion
Beatrice Uhlířová
Compared to the majority of cryptocurrencies that are very volatile, stablecoins offer a much safer and more stable value than Bitcoin or Ethereum. According to the website CoinMarketCap, the top 3 most essential stablecoins are $USDT, $USDC, and $BUSD, whose value tends to be around $1 as they are pegged to the U.S. dollar on a 1:1 ratio.
When the value of a stablecoin significantly detaches from its original or pegged value, this is called de-pegging, which can be caused by market conditions, liquidity issues, and/or regulatory changes.
On 10 March 2023, the stablecoin $USDC – a fully reserved-backed coin by United States treasuries – significantly deviated from its pegged value by dropping it to $0.87. This might not seem like much, but in a stablecoin it is a big deal. The $USDC price flooded because of the collapse of the Silicon Valley Bank, the 16th largest bank in the U.S. According to Circle, the $USDC issuers, $3.3 billion of the $40 billion $USDC reserves, were stuck in the Silicon Valley Bank.
As mentioned before, stablecoin de-pegging is a real thing. These crypto assets can de-peg due to micro and macroeconomic factors. The microeconomic factors to consider are shifts in market conditions, problems with liquidity, and modifications to the underlying collateral. On the other hand, the macroeconomic factors to consider involve changes in the economic landscape, like inflation or interest rates. Other important aspects are regulatory changes, as the government might ban stablecoins or smart contract flaws.
Although stablecoin de-pegging does not happen that often, it is still a genuine possibility, and the crash of $USDC in March 2023 made that very clear. The asset quality and risk management of these stablecoins are being questioned, and investors and traders are being advised to take a closer look at stablecoins.
Sources: cointelegraph.com, www.forbes.com
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