The collapse of SVB Financial’s (NASDAQ: SIVB ) Silicon Valley bank touched every corner of the investment world. It sent bank stocks tumbling on fears of contagion. It sent tech stocks tumbling because of its close relationship with the bank. This has investors worrying about whether we are heading headlong into a fiscal crisis. The government is trying to control the situation and maintain investor confidence. But if anyone seems to have the news, it’s likely to be stablecoin traders.
The cryptocurrency space was in trouble when Silicon Valley banks began to collapse rapidly. Among the bank’s many clients, a large number of cryptocurrency companies of a size can be counted. Meanwhile, the cryptocurrency industry has been in a marked decline, especially stablecoins. In fact, stablecoins, while not designed to rise or fall in price, are inherently volatile.
Regulators are putting pressure on these assets more than they have in the past few years. Binance (BNB-USD) is having a bunch of trouble with the SEC’s flagship stablecoin. The SEC has ordered the company to stop minting Binance USD (BUSD-USD), one of the most widely used stablecoins in the world, as of early 2023. The move heralds trouble for other stablecoin companies and puts the entire cryptocurrency niche in trouble.
Circle, the company responsible for USD Coin (USDC-USD), another of the largest companies in the world, continued to struggle this week. The company is one of the closest cryptocurrency clients to SVB. But, fortunately for some token holders, the bad news was used to some savvy gains.
Silicon Valley Bank sparks turmoil in stablecoin market
Silicon Valley Bank counts Circle as one of its many clients. As Circle disclosed shortly after the bank’s collapse, it holds significant reserves, at least in Silicon Valley. As such, it is directly affected by the events of last week. And, it also counts five other banks as its custodians. As contagious fear grips the markets, Circle and its clients must fear hardships in order to calm down.
This ultimately led the USDC cryptocurrency down a volatile path. Shortly after disclosing its exposure to the bank, Circle’s USDC dropped rapidly. The stablecoin lost 12 cents, with the price falling to 88 cents from the $1 peg. And, it also sparked volatility in other stablecoins. Even though it has no exposure to SVB, the stablecoin Dai (DAI-USD) also de-pegged, falling to around 90 cents.
Savvy traders use stablecoins to de-peg for cheap loan repayments
Under no circumstances will stablecoins break away from their pegs, and these projects aim to correct this volatility immediately. However, there are many cryptocurrency traders who are quick to act and think. These traders turned what began as an ongoing disaster into a moment of prosperity.
Stablecoins are widely used for decentralized lending on platforms such as Aave (AAVE-USD) and Compound (COMP-USD). As with other loans, a person owes a debt to the creditor and must repay the money borrowed. Well, the moment USDC and DAI were decoupled, many traders decided to pay back their loans at a discount.
CoinTelegraph reported that $2 billion in loans were repaid during this period. This is a substantial increase in the average daily loan repayments. Over 75% of these repayments were paid in USDC and DAI. So, for those resourceful enough, there is evidence that SVB’s debacle can be used to profit.
As of the date of publication, Brenden Rearick did not hold (directly or indirectly) any position in securities mentioned herein. The views expressed in this article are those of the author and are governed by InvestorPlace.com Publishing Guidelines.
Brenden Rearick is a Financial News Writer for the InvestorPlace Markets Today team. He primarily researches Crypto assets and tech stocks, with a focus on cryptocurrency regulation and DeFi.
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