#Decrease in USDC Circulation
Here is an analysis of what is known so far about the decrease in the circulation of $USDC (USD Coin), its causes, implications, and what to watch for. If you want, we can translate it into the context of Europe or make hypotheses about what is to come.
🔍 What has been observed
In the last week, the circulating supply of USDC decreased by approximately US$ 1.1 billion. This decline is mainly concentrated in the Ethereum network, which hosts ~64 % of all circulating USDC.
This decrease is framed within a broader context of liquidity rebalancing among blockchains and demand for stablecoins.
Other older reports show larger declines: for example, by the end of 2023 USDC had reduced its circulating supply from about $45 billion to ~ $25 billion, due to a combination of redemptions, withdrawals, and adverse macroeconomic conditions.
⚙️ Possible causes
These are some of the reasons behind that reduction in supply:
1️⃣ Redemptions
Users/investors withdrawing USDC and converting it to USD fiat or to other stablecoins/assets, which reduces the number of USDC tokens in circulation.
2️⃣ Decrease in demand for uses in DeFi / trading
If there is less activity in DeFi protocols that use USDC as collateral, for loans, for liquidity, etc., demand may decrease, leading to token burns or withdrawals.
3️⃣ Opportunity costs against rising interest rates
When interest rates rise (or are expected to rise), keeping stablecoins “parked” cryptographically without earning interest may seem less attractive compared to traditional instruments. This may incentivize withdrawing liquidity from USDC to place in instruments that do yield.
4️⃣ Regulation or perceived risk
Regulatory uncertainties, changes in reserves, audits, etc., can affect the confidence in holding USDC. If people perceive risk, it may trigger redemptions. Additionally, past events such as the collapse of SVB (Silicon Valley Bank) showed how exposed USDC can be to access problems with banks/reserves.
5️⃣ Rebalancing among blockchains
Part of the decrease may simply be the movement of USDC from one chain to another, burns when transferred or converted, which affects the “circulating USDC” on certain observed chains (for example, Ethereum).
⚠️ Implications
Peg stability: USDC is designed to maintain a value close to 1 dollar. A large reduction in supply due to massive redemptions could create upward or downward pressure (if supply falls too much or if there are liquidity collapses) on exchanges.
Liquidity in DeFi and trading: Less circulating supply could reduce the liquidity available for swaps, staking, loans, etc., which may deteriorate market efficiency.
Circle's revenue: A significant part of Circle's revenue comes from the interest generated with the reserves backing USDC. If there are many redemptions, Circle will have fewer reserves deployed to generate those interests, reducing its margins. Additionally, changing rate conditions affect those revenues.
Movement towards other stablecoins or products: Investors may prefer alternatives that offer better returns or lower risk (other stablecoins, fiat instruments, higher yields). This may intensify the outflow of USDC if it is perceived that others offer better “value”.
🔮 What to watch out for
🔸Redemption vs issuance data: how many new USDC are being minted vs how many are being redeemed (burned).
🔸Reports of Circle reservations and their composition (how much is in cash, T-bills, liquid instruments?).
🔸Regulatory changes in the U.S. or in large jurisdictions affecting stablecoins (for example, reserve requirements, auditing, backing).
🔸Evolution of interest rates: if they are expected to rise or fall, how that changes the relative attractiveness of stablecoins.
🔸Adoption in other blockchains: if USDC migrates more to rapidly growing networks, the supply on Ethereum may fall even though the total global supply does not decrease as much.
🔸Competition: new regulated stablecoins, digital currencies issued by central banks (CBDCs), or other products could capture part of the market share.
