The stablecoin USDC has nearly regained parity with the U.S. dollar after rising just above $0.99 on March 12, 2023, at 7:20 p.m. Eastern Time. The stablecoin jumped back to the $0.99 range after the U.S. Federal Reserve revealed it would bail out depositors of California’s Silicon Valley Bank (SVB) and New York’s Signature Bank. Following the Fed announcement, Circle CEO Jeremy Allaire said on Twitter that the company would rely on BNY Mellon to settle the process of minting and redemption.
It's supposed to, but that requires substantial backing in USD to keep the price pinned.
Imagine someone with a huge amount of USD in one pocket and a huge amount of USDC in the other. They watch the price of USDC in USD around the clock. When they see the price for 1 USDC drop below $0.99, they start spending USD to buy USDC until it rises. When they see the price rise above $1.01, they start selling USDC for USD until the price drops. Since they buy for less than $1 and sell for more than $1, they profit from the few cents of difference.
If the backing runs out (or becomes temporarily unavailable, as I'm guessing happened here) then the price can drop well below $1.00. If you're holding funds in USDC and the price drops to $0.90, for example, you just lost 10% of your capital. When people see that happen, they tend to panic sell. That drives the price even lower. A chain reaction ensues that rapidly drives the price to 0. Recovering from this is nearly impossible. If you didn't sell, you're left holding a bunch of USDC that is now worth nothing.
This has happened to a couple of "stable" coins already.
USDC dropped to somewhere around $0.80 over the weekend. The exchanges stopped trading it to prevent collapse. They reopened now and managed to raise the price back to $1. Everyone holding USDC breathes a sigh of relief. Anyone who bought USDC when it was low just made 20% profit overnight.
I'm simplifying some things here, but that's the gist of it.
GloryBeckons 0 points 1 year ago
It's supposed to, but that requires substantial backing in USD to keep the price pinned.
Imagine someone with a huge amount of USD in one pocket and a huge amount of USDC in the other. They watch the price of USDC in USD around the clock. When they see the price for 1 USDC drop below $0.99, they start spending USD to buy USDC until it rises. When they see the price rise above $1.01, they start selling USDC for USD until the price drops. Since they buy for less than $1 and sell for more than $1, they profit from the few cents of difference.
If the backing runs out (or becomes temporarily unavailable, as I'm guessing happened here) then the price can drop well below $1.00. If you're holding funds in USDC and the price drops to $0.90, for example, you just lost 10% of your capital. When people see that happen, they tend to panic sell. That drives the price even lower. A chain reaction ensues that rapidly drives the price to 0. Recovering from this is nearly impossible. If you didn't sell, you're left holding a bunch of USDC that is now worth nothing.
This has happened to a couple of "stable" coins already.
USDC dropped to somewhere around $0.80 over the weekend. The exchanges stopped trading it to prevent collapse. They reopened now and managed to raise the price back to $1. Everyone holding USDC breathes a sigh of relief. Anyone who bought USDC when it was low just made 20% profit overnight.
I'm simplifying some things here, but that's the gist of it.