03/13 update below. This post was originally published on March 11

, ethereum and other major cryptocurrencies are braced for extreme volatility after Circle’s $43 billion USDCUSDC
stablecoin lost its U.S. dollar peg—topping off a wild week for crypto.

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03/13 update: The bitcoin and crypto market has rebounded after the U.S. government said it would step in to prevent a potential banking crisis from spreading. The price of bitcoin and ethereum have made up the ground they lost since Friday while Circle’s USDC stablecoin has regained its dollar peg.

“Bitcoin faces an important test of market sentiment,” Alex Kuptsikevich, FxPro senior market analyst, said in emailed comments. “During the day, we must watch closely to see if we have a clean sell-off by the hawks. If so, it’s an important signal that the recent rally was false and that the big players are still selling at better prices. Potential buyers would still be better off waiting for a fix above $23,000 to confirm a bullish reversal.”

The bitcoin price rebound was triggered by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) announcing on Sunday that all Silicon Valley Bank (SVB) deposits would be protected after the bank failed. The contagion had already spread to New York-based, crypto-friendly Signature Bank.

A joint statement from the Federal Reserve, the Federal Depository Insurance Corporation (FDIC) and the U.S. Treasury Department said all depositors who used Signature Bank would be made whole. “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the joint Fed/FDIC/Treasury statement said.

The crisis at Silicon Valley Bank last week was partly triggered by the Federal Reserve’s program of interest rate hikes over the last 12 months as it fights to drive down soaring inflation. Last week, Fed chair Jerome Powell said he expected interest rates to rise higher than the market was expecting. However, the market now expects the Silicon Valley Bank meltdown will force the Fed to pause its rapid program of interest rate hikes.

“It is clear that continued hikes risk further destabilizing the financial system, so the time in which the Fed will need to pause and then pivot could have been moved closer by the events of last week,” Marcus Sotiriou, crypto market analyst at digital asset broker GlobalBlock, said in an emailed note.

Silicon Valley Bank was forced to begin selling the government bonds it had bought over the last few years at a loss to cover a surge of withdrawal requests. The value of the bonds had fallen as the Fed ramped up interest rates.

Goldman Sachs analysts now “no longer expect” the Fed to hike interest rates later this month, with the Wall Street giant’s chief economist Jan Hatzius pointing to the “recent stress in the banking system,” according to a note to clients seen by Forbes.

The bitcoin price has sunk by 10% this week due to the failure of the crypto-friendly bank Silvergate, wiping away $100 billion from the combined crypto market as the price of top ten cryptocurrencies ethereum, BNBBNB
, cardano, dogecoin, polygon and solana go into freefall.

Now, the crisis at startup lender Silicon Valley Bank (SVB), where stablecoin issuer Circle held a part of its USDC cash reserves, is threatening to wipe out the second-largest stablecoin by market capitalization.

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“Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash,” Circle posted to Twitter, exacerbating a near-10% drop from its U.S. dollar peg. “While we await clarity on how the FDIC receivership of SVBVB
will impact its depositors, Circle and USDC continue to operate normally.”

Circle has $3.3 billion of the $40 billion backing its stablecoin was deposited at SVB. SVB deposits of up to $250,000 are guaranteed by the Federal Deposit Insurance Corporation (FIDC), potentially leaving Circle and other depositors out of pocket.

“FIDC deposits are only insured up to $250,000 and when there is a bank run, depositors might lose out,” Markus Thielen, head of research and strategy at Matrixport, said in an emailed note.

In a further blow, major U.S. crypto exchange CoinbaseCOIN
, which issues USDC through a joint venture with Circle, announced it has suspended U.S. dollar USDC conversions, posting to Twitter it would “temporarily” pause the conversions while banks are closed over the weekend.

“Circle is currently protecting USDC from a black swan failure in the U.S. banking system,” Circle chief strategy officer Dante Disparte posted to Twitter. “Silicon Valley Bank is a critical bank in the U.S. economy and its failure—without a Federal rescue plan—will have broader implications for business, banking and entrepreneurs.”

California-based SVB was taken over by regulators and shut down on Friday after panic spread among depositors who yanked around $40 billion from the bank and efforts to raise fresh capital failed.

The bank’s woes are thought to have begun when the U.S. Federal Reserve began hiking interest rates last year, wiping out the value of its mortgage bonds and US Treasuries. This week, Fed chair Jerome Powell told lawmakers he sees interest rates rising past market expectations this year.

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Meanwhile, Circle’s banking problems, adding to the crypto crisis sparked by the collapse of Silvergate earlier in the week, have caused bitcoin transaction fees to spike as traders frantically try to secure their crypto.

“Bitcoin network transaction fees are very high and are indicating panic,” Thielen said, adding the largest stablecoin tether has managed to hold its dollar peg for now.

“From the three major stablecoins, we now have one standing and of course, that’s the big one. Tether’s USDTUSDT
which has weathered the Paxos-Binance BUSDBUSD
storm in February and is also now weathering the Circle USDC storm.”

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