Key Takeaways
USDC’s market cap has dipped from $54 billion to $30 billion in the last eight months
The stablecoin has lost market share since March, falling from 32% to 23%
Regulatory concerns and the fallout from the SVB collapse have plagued the stablecoin, whose struggles signify the capital flight out of the crypto industry as a whole
Crypto prices have been on the rise over the past couple of months, but that is not to say that all is well in the sector. As I have analysed before, capital has flooded out of the space at a scarcely believable pace, with $22 billion in stablecoins alone leaving exchanges in the last five months.
USD Coin, the world’s second largest stablecoin, illustrates the struggle well. The Coinbase-backed cryptocurrency held a market cap of $54 billion last August. Today, it is below $30 billion.
The coin has had its fair share of battles. The first is, well, it is a cryptocurency, and that means it operates in an industry that has been ravaged. Last year’s scandals hurt the space deeply, none more so than FTX’s startling collapse in November. Since the exchange went under, liquidity has poured out of the industry. Plotting USDC’s fall against the total market cap of all stablecoins shows that, while USDC has been worse, the entire sector has been hit.
However, USDC has faced other battles, too. In March, Silicon Valley Bank failed in the US, guilty of mismanaging its risk in the face of rising interest rates, ultimately succumbing to mismatched duration as its bonds sold off fiercely amid the swiftest interest rate hiking cycle in modern times.
The problem for USDC was that part of its reserves were held in this bank, throwing panic into the market. Later revealed as only 8.25% in SVB, the market went into a flurry, selling off the stablecoin in masse. The peg dipped down to 88 cents.
While the US administration stepped into guarantee all deposits at SVB a few days later, and the peg hence restored shortly thereafter, the dip in market cap didn’t fully recover. Prior to the SVB collapse, its market share among stablecoins was 32%. Two weeks later, it was 25%.
Today, the market share sits at 23%, and it continues to fall.
Regulation tightens on crypto
The other big factor in this is regulation. In February, the SEC announced it was suing Paxos, the issuer of the Binance-branded stablecoin, BUSD, for violating securities laws. The result was no more BUSD, minting of the stablecoin halted and the circulating supply slated to gradually dwindle towards zero.
On the surface of things, this sounds promising for USDC. The fall of a competitor and more room to suck up extra supply. However, the problem is that USDC’s parent company is Circle, which like Paxos, is also US-domiciled.
That means a fear that USDC could be next in line to get a knock on the door from SEC. The market has hence looked elsewhere, most notably Tether, which seized extra market share with aplomb, grinning smugly in the cosy confines of Europe, far away from the SEC. The world’s largest stablecoin has advanced to a 61% market share, its highest mark in two years.
The regulatory fears were exacerbated by parent company Coinbase being issued with a Wells notice, which typically precedes legal action. A Wells notice is a formal warning from the SEC that evidence of proof of lawbreaking has been found. Typically, legal action will follow. The claims surround (you guessed it) a violation of securities laws, and while it is not directly to do with USDC, it has not exactly helped its image in the market, as the market cap continues to head south.
Whether USDC can wrestle back market share in future remains to be seen. But its plight, and the overall state of stablecoins in crypto, highlight that while prices have recently been on the up, the state of industry is still very much a concern.
