USDC Is At Risk—What Does it Mean for Bitcoin?
Silicon Valley Bank collapsed causing a ripple effect on USDC, a key piece of crypto infrastructure. What happens next?
Silicon Valley Bank (SVB) collapsed. Everyone is blaming their political opponents, but in reality, it was a combination of variables, including:
The Fed lowered interest rates to zero to offset the negative consequences of Covid lockdowns
The Fed denied that inflation (caused by low interest rated and money printing) was a problem
The Fed hiked interest rates at an unprecedented rate, causing SVB assets to decrease in value
Venture capitalists panicked and recommended that their portfolio companies withdraw their deposits from SVB in mass
SVB was forced to sell assets at a loss because of their industry standard fractional reserve banking approach
Circle, the manager of USDC, a crypto stablecoin, had diversified its reserves across several different banks to mitigate exactly this kind of risk—the risk that a bank could collapse. Silicon Valley Bank was one of the banks that Circle used. It seemed like Circle had practiced good risk management and that USDC would be totally fine, however, facts don’t matter, people’s perception matters, and people panicked. Circle traded at a low of $0.85 but is now nearly back at parity, as shown in the chart below.
Will the SBV collapse spark contagion across the economy? Was it a symptom of larger systemic issues? I don’t know. But I do know that the economy depends on people and businesses trusting that they can deposit money at a bank and withdraw it in full. That’s why many experts expect the government to backstop the situation and/or that a larger bank will acquire SVB. This would be good for USDC (although it might be fine regardless) and therefore good for crypto.
In this issue, I cover why I bought Bitcoin amidst the chaos, what would make me buy more, what would make me sell, and my best bearish and bullish arguments.
My Outlook and Game Plan
Everything is super scary right now. We don’t have all of the information we need. Will SVB get “bailed out” or acquired? How much sell/redemption pressure will USDC face? No one knows.
I’m leaning bullish but as always am practicing good risk management in terms of my position sizes and implementing stop losses. Here’s my game plan along with bearish and bullish signals:
Gameplan
I bought Bitcoin at $20K on Friday night. It was scary but that’s often a good sign.
I plan to buy more Bitcoin if it goes above $21.5K
My stop loss to sell is at $19K
Reasons to be bearish
USDC is at risk (but it’s almost back at parity now)
The entire banking system—and therefore the entire economy—could collapse (low probability IMO)
Reasons to be bullish
Bitcoin is still above $20K—a major support level shown on monthly chart below—despite all the horrible news
Bitcoin is above the 200-day moving average
Almost every one wants the system to stay together. Smart people are working on solutions and persuasive people are keeping everyone calm.
Sentiment is god awful. Almost everyone is fearful right now. Sentiment is a counter-indicator: bearish sentiment is bullish.
If the market can handle all of this bad news, and it turns out that USDC (and the banking system) is fine, it would be a good sign
People might better understand the value proposition of Bitcoin now that they’ve experienced some of the flaws in the current system
The Bitcoin Charts
Monthly Chart
Bitcoin pulled back to $20K on the monthly chart, a major support level, and is now slightly above it.
If I ignored the news and only looked at the charts, I’d be very bullish right now. I don’t make decisions solely based on charts (technical analysis), but it is my most heavily weighted factor (fundamentals and sentiment are second). The monthly chart is my most important chart for long-term positions, and my most important signals are: pull backs to support and break outs above resistance.
I bought Bitcoin at $20K because it had pulled back to a key support level.
If Bitcoin closes a monthly candle below $20K ($19K on weekly and daily charts), I’d be looking for it to retest the November lows, and if it retests the November lows, I wouldn’t have confidence that it would hold. In other words, this is a do or die spot for Bitcoin and it has a good risk to reward tradeoff which I’ll show below.
Weekly Chart
Here’s the trade I took on Friday:
Entry: $20,000
Stop Loss: Weekly candle close below $19K
Target: $24,500 (although I might hold it for longer depending on the price action if/when it gets there)
That’s a potential gain of about 22.5% and risk to reward ratio of about 3.5. That’s pretty good.
I still believe that it’s likely the bottom is in and that the next bull market will get rolling soon (as long as USDC doesn’t collapse). So I might turn this swing trade into an investment and not sell if/when it gets to my price target.
Daily Chart
The 200-day moving average (blue line in daily chart above) is an old-school technical indicator that a lot of people in TradFi look at. Bitcoin pulled back to it and is currently above it. That’s another bullish signal.
I’m looking to buy more Bitcoin after we get more information about SBV and USDC and if Bitcoin shows strength by getting back above $21.5K. This has a higher probability of being a winning trade than the trade I took on Friday, but has less potential reward.
$25K is still resistance until proven otherwise, but I do believe it will break within the next few months.
If Bitcoin spends more than 24 hours below $19K, the daily chart would signal me to sell. If we don’t get a solution to the SVB debacle, or if USDC collapses, I’d expect $19K and potentially much lower. But again, I’m leaning bullish as of right now.