In 2022 we saw the dramatic FTX collapse that almost wiped out the crypto market. Now, the Silicon Valley Bank (SVB) has crumbled. SVB was, prior to its doomsday, America’s 16th-largest commercial bank.
It was the provider of banking services to almost half of all US venture-backed technology and life science companies. Despite it being tech-focused, SVB also had cryptocurrency companies depositors.
So, once again, the crypto space is caught in the shitstorm.
Why Did The Silicon Valley Bank Crash?
The Silicon Valley bank was heavily focused on US technology start-ups. These start-ups made a lot of money during the COVID-19 pandemic.
Why? Their businesses of entertainment and delivery services boomed in quarantine. So, they’ve got profit that they deposited in SVB. SVB saw an increase in deposits. It took this money and invested them in US government bonds.
What’s a Government Bond?
A government bond is a debt security that the government issues. This is usually used to support government expenses and obligations. Since the government backs these bonds, they’re usually considered low-risk investments.
Why Was It a Bad Investment for SVB?
If these investments are considered somewhat safe, why did the Silicon Valley bank crash? First, because these lock up money for 5-30 years. And, they’re not liquid. So, issue number one is that SVB didn’t hold deposits in something liquid.
Second, this investment is “low-risk” and not “zero-risk”.
In this case, the risk investors are exposed to is interest rate fluctuations. These bonds and rates have an inverse relationship. When interest rates go up, the bond value goes down, and vice versa.
Well, after the pandemic the US faced soaring inflation. This pushed the US Federal Reserve to raise interest rates. The consequence? The value of these bonds decreased.
Well, Why Did The Silicon Valley Bank Sell Now?
You might be thinking, if the value of the bonds is low, SVB should hold. Why would anyone sell at a loss? Well, no one would unless they had to. And, the Silicon Valley bank simply had to.
In the middle of cold inflation, people want money. So, depositors started withdrawing their money from SVB. The bank needed more money to give to its depositors. So, it had to sell the bonds at huge losses.
This spiked worry amid depositors. Within 48 hours, everyone was withdrawing their money in mass from SVB. And so the bank collapsed.
James Butterfill, CoinShares investment strategist, told Decrypt “When you raise rates this aggressively, something’s going to break eventually, and I think we’re starting to see that.”
Couldn’t The Silicon Valley Bank Make A Better Decision?
What are the odds that THE Silicon Valley bank did not think of this risk beforehand? Well, James Angel, an expert on the regulation of global financial markets at Georgetown University, said to Al Jazeera that this is a “stupid rookie mistake”.
He said “SVB collapsed because of a stupid rookie mistake with their interest-rate-risk management: They invested short-term deposits into long-term bonds. When interest rates rose, the value of the bonds fell, wiping out the equity of the bank.”
“This is the same phenomenon that wiped out the US Savings and Loan industry in the 1980s. Some people never learn,” he noted.
Furthermore, Campbell R Harvey, a professor at Duke University’s Fuqua School of Business, said that SVB should’ve diversified its clientele. This makes sense because if your one group goes down, you’ll go down with it.
How Bad Is The Silicon Valley Bank Crash Contagion?
So, how many people did the “stupid rookie mistake” of SVB take down with it? As mentioned above SVB’s main clientele are tech start-ups and early-stage companies. These companies usually have between 10-100 employees so it isn’t that drastic of a hit.
As we know by now, the Silicon Valley bank was America’s 16th-largest commercial bank. It definitely holds its weight in the US. Its meltdown marks the 2nd largest bank failure in the history of the US, second only to Washington Mutual in 2008.
So, even if only start-up companies have put their money there, they matter. If a solution isn’t found, these companies will be forced to shut down and a hell lot of people would be out of jobs. Plus, that is a drastic punch to the gut to the already struggling US economy.
Other Affected Banks
Moreover, we started seeing the SVB collapse contagion.
- U.S. banks lost $100 billion in 2 days.
- Bank shares, including those of the US “big four” (JPMorgan Chase, Bank of America, Wells Fargo, and Citibank), have drastically decreased because of fears of contagion in the financial sector.
- The stock price of the First Republic Bank, a mid-tier bank based in San Francisco, California, plumped 60 percent down.
- Bank shares in Europe and Asia have also taken a noticeable hit.
Impacted Crypto Banks
But, what matters to us crypto peeps is the Signature bank and Silvergate Capital bank. Why? Because they’re both heavily crypto-focused. So, what happened to these two?
- Silvergate Capital, a central lender to the crypto industry, announced that it would be discontinuing its operations and liquidating its bank.
- Signature bank, which had a stronger crypto weight, was seized on Sunday evening by banking regulators.
Basically, they both were forced to close.
Silicon Valley Collapse Takes Cryptocurrencies Down With It
After Silicon Valley collapsed taking Silvergate Capital and Signature banks with it, what’s the future of crypto? The crypto markets lost $100 billion in 24 hours. Cryptocurrencies’ prices, including stable coins’, dipped pushing NFT collections down into the abyss with it.
Not-So-Stablecoins’ Prices Surge
Well, after the crash (March 10-11th), stablecoins’ prices shot down drastically. You can see the dip in the graphs below by coingecko.
Considering the stablecoins are supposed to be… stable, this spiked worry in the community.
Bitcoin, ETH, Solana, and Cardano Prices Also Shoot Down
Moreover, following the crash of the crypto-friendly banks Silvergate and Signature, the infamous cryptocurrencies also tumbled down in price. You can see how the prices of BTC, ETH, SOL, and Cardano fell around 10-11 March.
NFT Projects’ Prices Fall
Naturally, when cryptocurrencies take a hit, NFT collections will follow. As you can see per the charts by coingecko, all projects, including blue chips, are down in the last 7 days.
What’s The Future Of Crypto After The Silicon Valley Bank Crisis?
The Silicon Valley, Silvergate Capital, and Signature banks crisis punched at cryptocurrencies pretty badly. Even though crypto took a tough hit, prices seem to be going up again. We can see that by taking one look at the charts above.
2022: Deposit holders can’t access their crypto at FTX because of fraud.
2023: Deposit holders can’t access their cash at Silicon Valley Bank because of horrendous risk management.
— Genevieve Roch-Decter, CFA (@GRDecter) March 12, 2023
But, the crypto market seems to be drowning in problems these two years. SBF, SVB… I’m beginning to hate everything starting with the letter S. Besides Sappy Seals, of course. We just have to wait and see how things unfold this week. However, recently meta announced it won’t be supporting NFTs anymore. Despite the circumstances, the market seems to be going up. Is there a glitch in the system?