Notes 4/30: Bitcoin Price, USDC Peg

Bitcoin price remains poised before the $30,000 mark, a key resistance level according to analysts, over the weekend. As of this writing, the cryptocurrency is changing hands for $29,624.72, up by 1.5% from its price a day earlier. In the past week, it has rallied by 6.3% based on data from CoinGecko.

Explanations for the cryptocurrency’s price increases have hopscotched between narratives. Some of them are related to the macroeconomic situation. For example, woes at the First Republic Bank were said to have triggered its brief run past $30,000 last Wednesday. Others are related to its ecosystem. The US government is reportedly sitting on a significant holding of the cryptocurrency and is planning to sell them off, according to one such explanation for the price bump.

A Different Story of Liquidations

Hard data tells a different story, however. Bitcoin liquidations, both long and short, continued apace in April even as the cryptocurrency’s price remained rangebound. Roughly, $3.6 billion worth of bitcoin positions were liquidated, according to figures from Coinglass.

An equal number of long and short positions were liquidated. That represents a change from past months when short term investors led the way in liquidating their positions. The cryptocurrency’s proponents point to wallets with long positions to justify its price and appeal. An increase in long position liquidations signals fewer such wallets.

Fewer Miners and Economic Triggers

It has also become more expensive to mine a bitcoin in the United States, the biggest center for bitcoin mining in the world. Not surprisingly, the cryptocurrency’s hash rate – the total number of systems deployed to mine it – fell off a cliff in the last week. Miners defect from the bitcoin ecosystem when the cost to mine it increases while its price remains constant.   

One could make the case that a change in economic news will bring a fresh influx of new traders to the cryptocurrency’s ecosystem. But they will have to contend with shrinking liquidity. It has plummeted from $120 million at the start of this month to $108 million last Thursday. Apart from the employment report and the Fed’s meeting, the coming week does not hold many economic triggers or, for that matter, much cheer for bitcoin. An expected increase in interest rates by the Federal Reserve will further stanch demand for bitcoin.

Is Circle’s USDC Due Another Loss of Peg?

That seems to the consensus among traders on decentralized finance (DeFi) platforms. There is almost $21 million riding on wagers that USDC will fall to $0.98 in the coming weeks. Around $90 million is betting that it will lose its peg to a range between $0.90 and $1.

What might cause a loss of peg?

USDC is among the few stablecoins that are regulated. But regulation has not been enough to adequately account for risks emanating from the crypto ecosystem. The stablecoin lost its peg, falling to as low as $0.88, and its market capitalization crashed in March after it revealed its exposure to Silicon Valley Bank, one of the two banks that witnessed a run on its deposits.

Circle has, since shifted and consolidated USDC’s banking relationships. According to the stablecoin’s last attestation report at the end of March, Circle held the cash deposits for its reserves at three banks – Bank of New York Mellon, Cross River Bank, and Customers Bank.

Cross River Bank received a cease-and-desist order from FDIC for “unsafe or unsound” practices last week. According to the agency, the bank failed to maintain internal controls, information systems, and prudent credit underwriting practices. For its part, the bank has dismissed speculation that it is in trouble and said that the order will not have a “meaningful impact” on its growth.

While it is difficult to predict the bank’s future, the order is certainly having a meaningful impact on trader perceptions of USDC. USDC is used mainly as a proxy for fiat currency in smart contracts on DeFi platforms. It is also a major part of collateral and reserves for stablecoins like MakerDAO, meaning a loss of peg for the stablecoin will tip over the DeFi house of cards.  

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