I wrote this article some time ago, but I want to know your opinion about this matter now. All the info is true to the end of April.
Are we facing yet another global banking crisis in 2023? Haven't we endured enough turmoil in recent years? Did the actions and decisions of individuals ultimately lead us into this recession? It is crucial that we uncover the underlying causes and determine who emerges as the victor in this situation. To gain a comprehensive understanding of the current state of affairs, let's delve into the chain of events that have precipitated the impending economic crisis.
Banking crisis of 2023In a brief span of time this year, three banks that previously served as deposit collectors for cryptocurrency companies—Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital—collapsed, shedding light on the potential instability of stablecoins. Circle, a fintech company, made a startling revelation regarding its substantial $3.3 billion exposure to SVB. Consequently, the price of its USDC token experienced a momentary dip, plummeting to 88 cents instead of its customary one-dollar value. However, thanks to the diligent efforts of US regulators in safeguarding deposits within Silicon Valley, and Circle's commitment to extending financial support, the token managed to regain its initial value.
The Federal Reserve, the agency in charge of steering the U.S. economy, has recently published a report examining the likely repercussions of the current banking sector difficulties. This report suggests that the economy might enter a recession later in the year due to the banking crisis. The Federal Reserve's team forecasts a moderate recession in the later part of this year, with economic recovery anticipated over the subsequent two years.
The report also discloses that the Federal Reserve is predicting a mere 0.4% growth in the Gross Domestic Product (GDP) for 2023, implying an economic slowdown. This prediction follows the Federal Reserve's decision to raise the benchmark borrowing rate by 0.25 percentage points, leading to a target range of 4.75%-5%, the highest level since 2007. This hike in rate came shortly after the collapse of Silicon Valley Bank, one of the largest banks in the U.S., due to a bank run. The fallout from the failure of this and other banks necessitated the establishment of emergency lending mechanisms to ensure the continuity of banking operations.
The report suggests that inflation figures have generally been in alignment with the Federal Reserve's objectives. Nonetheless, the broader economic scenario remains unpredictable, especially considering the banking sector's troubles. In response to these difficulties, Federal Reserve officials have inaugurated a new borrowing facility for banks and relaxed terms for emergency loans at the discount window, intending to assist the industry in weathering its problems. Despite these measures, officials anticipate that lending will become more restrictive and credit conditions will worsen, hinting at additional economic challenges ahead.
A number of decision-makers pondered whether it would be better to maintain the existing rates while they monitored the development of the crisis. However, they unanimously agreed to further increase rates due to heightened inflation, robust recent economic data, and their dedication to reduce inflation to the Committee's long-term target of 2%.
In simpler terms, it's not looking good for us. Yet, amid all this turmoil, guess what's flourishing? If your guess was USDT, you've hit the nail on the head.
Stability of Tether(USDT) in 2023In recent weeks, the contentious stablecoin Tether (USDT) has risen as the preferred choice for traders seeking a safe harbor amidst the United States' banking disturbances. The banking turmoil in America, notably the demise of Silvergate and Silicon Valley Bank, has exposed that heavily regulated, dollar-backed stablecoins like USDC may not be as steady as crypto proponents propose. The USD Coin (USDC) fell under 90 cents, and decentralized stablecoins frax and dai strayed from their targeted dollar value. On the other hand, Tether's more contentious stablecoin, USDT, which doesn't depend on dollars in American banks, has maintained its proximity to its dollar peg over the weekend, even trading at a surplus. This could be attributed to its minimal exposure to the US banking system, making it one of the most secure stablecoins to switch to at present. Nevertheless, both stablecoins saw their prices slip below the dollar value. This situation has highlighted that stablecoins, even those anchored to fiat currencies, are just as dependent on banks and government actions as their traditional fiat counterparts.
Tether's announcement of a $700 million profit in Q1 and its exceeding of the $1 billion surplus reserve mark is noteworthy in the stablecoin market. Stablecoins, designed to safeguard against price fluctuations, are a more appealing investment choice for novice investors. Tether's expansion is a testament to the growing adoption of stablecoins as a safer investment option. Yet, Tether’s opaque financial practices have been a consistent point of contention, with the firm failing to disclose the identity or location of the companies from which it has acquired debt. The firm has reallocated its holdings to more trustworthy U.S. Treasurys, but the lack of transparency could still be alarming for certain investors. The surge in Tether’s utilization following the collapse of Silicon Valley Bank underscores the crucial role stablecoins play in managing risk and upholding the stability of the crypto market.
Tether's resilience amidst the crisis can be attributed primarily to its lack of direct involvement with SVB, where it simply did not have any deposits. Other stablecoins also experienced indirect exposure and lost their peg because they were largely collateralized by USDC. However, it's still important to proceed with caution, as Tether has previously grappled with fear, uncertainty, and doubt (FUD), as well as redemption challenges. Further stress tests would reveal its long-term robustness.
In order to understand the stability of USDT, it would be beneficial to draw a comparison with USDC. Let's delve into some of the statistics:
x axis - date, y axis - price
Graph of the USDT’s price changes https://i.ibb.co/GQNwStP/Screen-Shot-2023-04-24-at-19-06-28.png
Graph of the USDC’s price changeshttps://i.ibb.co/BjLjyjt/Screen-Shot-2023-04-24-at-19-06-58.pngAlso, let’s look at the numerical data:
https://i.ibb.co/SB9Xmkf/Screen-Shot-2023-05-17-at-10-15-24.pnghttps://i.ibb.co/s5Bp2kV/Screen-Shot-2023-05-17-at-10-14-06.png As it currently stands, USDT is outperforming. But will it maintain this position over time?
USDC and USDT can be seen as two facets of the same entity, both being centralized stablecoins with significant roles in the crypto economy. Their primary function is as a trading instrument and they stand at the heart of a majority of DeFi products and traditional cryptocurrency exchanges. However, following the collapse of the algorithmic stablecoin TerraLUNA, regulatory tightening, and banking disasters, the central figures in the crypto sector have been revealed to be perilously overleveraged.
Cryptocurrencies cannot rely on banks and maintain stability, and the handful of banks that dare to engage with Web3 face scrutiny and advice against servicing the crypto industry. If any cryptocurrency, beyond Bitcoin, aims to provide users the option to safeguard against dollar instability, it must largely disengage from fiat currency. Already in existence are algorithmic stablecoins and crypto-backed stablecoins that use only Bitcoin and/or Ethereum to mint and redeem stablecoins on demand for any currency. If the crypto ecosystem aims to become resistant to banking crises, then it might be necessary for crypto companies to begin establishing liquidity with inherent solutions.
ResultsThe analysis implies that while USDT has become a refuge for traders amidst the recent banking issues, it's crucial to exercise caution due to Tether's historical encounters with fear, uncertainty, doubt (FUD), and redemption challenges. The market continues to show a strong demand for stablecoins and highly values their potential. The efficiency and robustness of stablecoin hedging strategies have also been proven, suggesting that they can swiftly regain their pegs when facing hurdles. However, the enduring resilience of Tether and other stablecoins is yet to be determined, and additional stress tests might be required for evaluating their future stability.
