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How did traders use the situation with bank collapses to their advantage?

Three weeks ago, in the last week of February, Byrne Hobart, the author of The Diff, a popular economic mailing list with 48,000 subscribers, issued a warning – he described the likely scenario for the collapse of the Silicon Valley Bank (SVB). Hobart pointed to the inconsistency in the market valuation of SVB’s assets and the fact that, according to the published balance sheet, the bank has been insolvent for at least one quarter. In the comments, ordinary subscribers called it nonsense and did not believe in the insolvency of the bank, writes RBC Crypto.

On Friday, March 11, SVB went bankrupt, unable to cope with the influx of people wanting to withdraw deposits, and this was the second largest bank failure in the US since the 2008 crisis. The event created a resonance and a chain of consequences for business and the banking system as a whole, but there were also those who successfully took advantage of non-public information or the opportunities that the market opened up.

The theory that Hobart’s letter could have been a precursor to the collapse of the SVB quickly spread on social media. As lead writer of another popular business mailing list, Evan Armstrong, put it, The Diff has “every VC he knows” following. Representatives of at least six large funds investing in crypto business or directly in crypto assets confirmed to The Block journalists that a few days before the collapse of the bank, they recommended portfolio companies to withdraw assets from SVB as soon as possible. These funds include crypto-focused Pantera Capital and Peter Thiel’s Founders Fund, which has raised more than $1.8 billion from Bitcoin’s rise.

According to experts Bloombergon the collapse of SVB shares, traders collectively earned on short positions of about $0.5 billion, however, due to its peculiarities, it was the cryptocurrency market that opened up opportunities that are inaccessible in the traditional stock market, by definition. Trading on it goes around the clock, exchanges independently make decisions on the listing of assets, and all trading operations are available for tracking in the blockchain – a public registry of cryptocurrency transactions, at any time available for monitoring by researchers and analytical services.

We work without days off

The most notable impact on the crypto market was the temporary loss of parity against the US dollar for the second largest stablecoin, USD Coin (USDC), issued by Circle in partnership with the Coinbase exchange. When Circle management confirmed that the company held $3.3 billion in SVB accounts to secure USDC (about 8% of reserves), stablecoin holders began to massively withdraw funds from it, converting them into dollars or other available crypto assets.

Due to a lack of liquidity, the USDC rate dipped below $1 and dropped to $0.86 at the moment. On the night of March 11, Circle closed all available channels for withdrawing USDC into dollars, including through the Coinbase exchange, fearing an even greater drawdown in the rate. The company explained the decision as a “bank holiday”.

Believing that the reputation and financial capabilities of Circle would eventually help restore the USDC rate to the dollar, traders and funds began to buy the stablecoin at a discount, hoping to make a profit of about 10% when the USDC returns to a “stable” rate. Already on March 11, the total trading volume in USDC against the US dollar reached a historic high, the stablecoin rate exceeded $0.9, but did not recover due to the ongoing mass withdrawal of assets.

The largest crypto exchange Binance is the first opened trading USDC in pairs with other stablecoins. Out of context, such a decision might seem absurd – the rate of any of the stablecoins is $1, and trading one of them in a pair with another would seem to make no sense. However, the decoupling of USDC from the dollar provoked a strong rush, beneficial to trading floors.

BitMEX exchange first launched Trade USDC perpetual futures with up to 10x leverage. Literally on the same day, almost all the largest trading platforms followed suit. On ByBit alone, on March 11, the volume of trading in a similar instrument exceeded $1.2 billion. Binance added perpetual stablecoin futures with leverage up to 30x, and Huobi – up to 50x.

Decentralized platforms also saw a surge in trading volumes. Uniswap recorded a turnover of $12 billion between March 11 and March 12, a record for a decentralized exchange. Curve’s figure reached $8 billion, and one of the largest liquidity pools on the platform at the moment was devastated due to the influx of transactions with USDC.

The discount on USDC opened up wide opportunities for earning on the arbitrage of cryptoassets. A researcher under the pseudonym Lookonchain gave an example transaction chains one of the “whales” (more than $200 million in crypto assets on the Ethereum blockchain), each stage of which can be tracked in the blockchain.

“Keith” used Ethereum (ETH) coins and stETH tokens (a derivative asset of the liquid staking service Lido) as collateral in Aave’s DeFi protocol to borrow $28,577,700 in USDT, Tether’s largest stablecoin by capitalization, the exchange rate of which remained pegged to the dollar . He exchanged the borrowed USDT for USDC, receiving $29,961,238 in USDC at the expense of the discount. When the USDC rate recovered, the trader repaid the loan and returned the collateral, receiving about $1.3 million in profit in less than two days.

On the night of March 13, the US government promised to fully compensate SVB deposits, at the beginning of business hours Circle announced that it had taken a number of measures to protect USDC reserves, and the stablecoin rate recovered, despite the fact that on the same day its capitalization decreased by another $1.7 billion

Get out in time

According to The Wall Street Journal sources, the US Department of Justice and the US Securities and Exchange Commission (SEC) initiated investigation against SVB, which also looks into the sale of shares that its employees made in the days before the bankruptcy.

The bank collapsed almost simultaneously with the other two – Silvergate and Signature, both considered loyal to the crypto business. The first served more than 1.5 thousand companies from the cryptosphere, and at the peak of the market in 2021, its deposits grew by billions of dollars, and shares soared by 1500%.

Referring to extracts from SEC documents, Blockworks journalists calculatedthat the top managers of the bank earned more than $100 million selling their shares, selling them during the period of record growth in the price of bitcoin and other cryptocurrencies in 2021.

As for Signature, according to the chairman of the board of directors of the bank, there was no real objective reason for its closure, and he called the decision of the US authorities to liquidate it “a very strong anti-cryptocurrency signal.” According to Bloomberg, the bank faced criminal investigation prior to its collapse due to its cryptocurrency operations. Circle used both banks, but management said the company had already found a new banking partner.

Source: Cryptocurrency

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