On-Chain Data Reveals How Trading Firms Worked the USDC Stablecoin Repeg

Trading firms were quick to jump on the USD coin (USDC) long trade last weekend as the stablecoin, which was meant to be pegged 1:1 to the U.S. dollar, fell to as low as 87 cents on news that Circle Internet Financial, the token's issuer, had exposure to Silicon Valley Bank, the bank that collapsed last Friday.

The concerns prompted a wave of USDC sales across decentralized-finance platforms, with a pool on decentralized exchange Curve comprising three equally weighted stablecoins becoming unbalanced as the supply of USDC skewed.

Traders began to withdraw stablecoins from centralized exchanges and swap tether USDT$0.9997 for USDC on decentralized exchanges, causing the highest volume of stablecoin outflows from crypto exchange Binance since the implosion of FTX, another crypto exchange, in November. A total of $2.8 billion worth of USDT was withdrawn from Binance in a 24-hour period, according to CryptoQuant.

A couple of high-frequency trading firms, in particular, capitalized on USDC's plight, with one wallet receiving $215 million of tether from Binance before executing 59 transactions that involved swapping USDT for USDC and the DAI stablecoin. The wallet made a profit of around $16.5 million, according to CryptoQuant research.

The arbitrage opportunity of trading tether, which retained its dollar peg, with USDC when it traded below 90 cents was huge, but not without risk.

"It was an evolving situation, and information was scarce," Mike van Rossum, founder of trading firm Folkvang, said. "Given what recently happened to FTX and other big crypto players, you can see why many wanted to derisk quickly.

"Nothing is safe, and trading is always about exposing yourself to some risk," he said. "But at some point, we thought the market was pricing in more risk than we thought was reasonable. Especially after the U.S. government came in to save Silicon Valley Bank."

Van Rossum confirmed that Folkvang bought the dip. The bet paid off: USDC recovered to $1 on Monday as Circle shored up its banking arrangements to ensure that every USDC token was backed with real dollars.

The resilience of USDC in what appeared to be a desperate situation demonstrates the risk-taking approach of crypto traders. Tether, the largest stablecoin by market cap, has suffered numerous deviations from its peg over the years, and yet it remains a critical part of crypto despite regulatory scrutiny.