Hello, A Stablecoin is also a CryptoCurrency!
USDC is a stablecoin that is pegged to the US dollar, meaning that each USDC token is backed by one US dollar. This ensures that the value of USDC remains stable and predictable, making it a useful tool for traders and investors. In this post, we will discuss how USDC holds its peg and what can cause it to lose its peg.
How USDC Holds its Peg?
USDC is issued by Centre, a consortium backed by Circle and Coinbase. Centre ensures that each USDC token is backed by one US dollar by holding reserves of US dollars in segregated accounts. This means that each USDC token can be redeemed for one US dollar at any time, providing a level of transparency and stability for users.
In addition, Centre conducts regular audits of its reserves by independent third-party firms to ensure that the amount of US dollars held in reserve matches the number of USDC tokens in circulation. This helps to ensure that the peg is maintained and that USDC remains a reliable stablecoin.
What Can Cause USDC to Lose its Peg
While USDC is designed to maintain its peg to the US dollar, there are several factors that can cause it to lose its peg, including:
Lack of Demand: If there is a lack of demand for USDC, the price may drop below its peg. This can happen if investors lose confidence in the stability of USDC, or if there are other stablecoins that are more attractive to investors.
Market Volatility: If the cryptocurrency market experiences high volatility, USDC may struggle to maintain its peg. This can happen if there are sudden price fluctuations in other cryptocurrencies, or if there is a market-wide panic that causes investors to sell their USDC holdings.
Audit Failures: If Centre fails to conduct regular audits of its reserves, or if an audit reveals that the amount of US dollars held in reserve does not match the number of USDC tokens in circulation, this can cause USDC to lose its peg.
Regulatory Changes: If there are regulatory changes that impact the operation of USDC, this can cause the value of USDC to fluctuate and potentially lose its peg. For example, if USDC is deemed to be a security by regulators, this could impact its stability and demand.
How Did USDC Lose its Peg In March of 2023?
Last month, Circle disclosed in a tweet that $3.3 billion out of its $40 billion of USDC reserves were held at Silicon Valley Bank, which has recently collapsed. This disclosure lead to a sell-off of USDC. We saw USDC break its 1:1 dollar peg and fell as low as $0.88. It has since recovered.
What have we learned?
My personal opinion is USDC is not more stable than USDT. Just remember, stablecoins are a cryptocurrency and all the volatility is there as well. It is safer and more conservative but know the risks.
Don’t Invest More than you can Afford to Lose!
-Vacation Steve
Sources:
https://twitter.com/GuardaWallet/status/1634486894955225089?s=20
https://twitter.com/jerallaire/status/1635114973830725633?s=20