USDC volatility lifts Bitcoin’s Coinbase premium to 3-year high

by James · March 12, 2023

The Silicon Valley Bank crisis and the resulting volatility in the world’s second largest dollar-pegged stablecoin, USD Coin (USDC), has bitcoin (BTC) trading at relatively higher prices on the Coinbase (COIN) crypto exchange.

Data tracked by research firm CryptoQuant shows bitcoin’s Coinbase Premium Index – which measures the spread between BTC’s US dollar-denominated price (BTC/USD) on US-based Coinbase and BTC’s tether-denominated price (BTC/USDT) on offshore giant Binance – rose to 0, 8, the highest since March 2020.

Bitcoin trading at a premium on Coinbase is often taken to represent stronger buying pressure from government institutions and sophisticated traders.

However, this time the prize probably represents the discount or flight from USDC. Bitcoin’s price on Coinbase became sensitive to USDC volatility since last July the exchange merged its order book – consisting of USDC as the base currency – with the USD order book (users can deposit USDC on Coinbase, but it enters the order book as USD ).

Supporting the argument that bitcoin’s current dollar-denominated price on Coinbase stems from the USDC discount is the fact that the BTC/USDT pair on Coinbase is trading pretty much in line with prices on other offshore exchanges.

“Because USDC is trading below its peg, BTC seems more expensive on Coinbase,” pseudonymous DeFi researcher Ignas told CoinDesk. “Therefore, the spot market for BTC needs to be adjusted to reflect the current USDC price.”

USDC fell as low as $0.90 late Friday, deviating from the $1:1 peg after its issuer, Circle Internet Financial, confirmed it had $3.3 billion in cash at the troubled Silicon Valley Bank. The news triggered a rotation of money out of USDC and into other assets, with Circle processing more than $1 billion in net redemptions. At press time, USDC had bounced to around $0.95.

Bitcoin at press time had retreated to $21,100 from a low of about $19,600 on Friday.

“When news broke that Circle’s funds were stuck in Silicon Valley Bank, users rushed to redeem USDC for USD,” Ignas said. “On Coinbase, users could redeem 1 USDC for $1.00, but Coinbase suspended conversions during the weekend when banks are closed, exacerbating the situation, leaving traders with no choice but to liquidate holdings in the spot market.”

“There is no USDC market on Coinbase,” Ignas added. “So the BTC/USD market is effectively functioning as a BTC/USD market.”