Bitcoin Price Tumbles as Silvergate Fears Wipe Out Bullish Crypto Traders

Text size

Bitcoin
and other cryptocurrencies were falling Friday as fears over

Silvergate Capital

took hold, with the crypto-focused banker’s distress risking negative impacts to market functioning and the regulatory picture.

The price of Bitcoin has fallen 4% over the past 24 hours to below $22,350, moving below $23,000, a level that the largest digital asset has held above for weeks. Sitting higher than $22,000, Bitcoin was at its lowest level since early February.

“If Bitcoin fails to defend $22,000, the next stop will likely be around $21,400, where its February low and November high are converging,” said Yuya Hasegawa, an analyst at crypto exchange Bitbank.

It seems that worries over problems at Silvergate (ticker: SI) are finally gripping traders. Silvergate, an influential banker to digital asset companies and key intermediary in the institutional crypto market, revealed in filings late Wednesday that securities sales amid a bank run could leave it “less than well-capitalized.” A federally insured bank, the group said it was evaluating its ability to continue as a going concern and was “in the process of re-evaluating its businesses and strategies,” also noting regulatory scrutiny.

Initially, the impact on crypto prices was muted: Bitcoin slowly slid down from above $23,500 to below $23,300 between late Wednesday and through Thursday, before prices plunged to nearly $22,000 early Friday. Prices fell sharply as Bitcoin declined below $23,300, driven by losses in crypto derivatives market, where Bitcoin futures represent the most liquid market across digital assets. 

Bitcoin futures positions are often taken with margin, or money borrowed from a broker, and can be wiped out in the blink of an eye if the value of the collateral—often Bitcoin itself—falls below a required level. Almost 80,000 traders have had crypto futures positions—across not only Bitcoin—liquidated in the past 24 hours, with $240 million wiped away, according to CoinGlass data.

“The dip has pushed the price below its 50-day moving average, which does not bode well for the short-term outlook,” said Alex Kuptsikevich, an analyst at FxPro. 

Indeed, it’s likely that these issues endogenous to crypto will dominate market sentiment in the immediate term, eclipsing the correlation to the stock market that often sees Bitcoin trade in step with the

Dow Jones Industrial Average
and

S&P 500.
But traders would do well to keep an eye on equity markets, where investors remain concerned around inflation and interest rates—forces that are likely to remain key for sentiment around crypto in the longer term.

A key concern around Silvergate is that problems at the bank could impact liquidity in crypto markets. The company facilitates transfers between exchanges and market makers—which do a lot of the trading in Bitcoin—and if that stops it could exacerbate liquidity issues that have existed for months, making crypto more volatile. 

While that trend may already be in play, with numerous exchanges and trading firms already announcing that they are halting business using Silvergate’s platform, it may not be devastating, according to one market participant.

“Fortunately, Silvergate is not FTX. Silvergate is more of a fiat on/off ramp for U.S. dollars, rather than a key source of liquidity and volume for the entire crypto ecosystem,” said Michael Safai, managing partner at crypto trading firm Dexterity Capital. “In an absolute worst-case scenario, confidence gets shaken a bit, which may cause some firms to temporarily pull some capital out of the market.”

Regulatory concerns are also important, especially since legal storm clouds have gathered around the industry since FTX collapsed in November. In late February, the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller warned banks of the risks of taking deposits from crypto firms. Silvergate said it was “analyzing certain regulatory and other inquiries and investigations that are pending.”

“For the short-term, the problems facing Silvergate may well roil the crypto industry,” said Dave Weisberger, the CEO of CoinRoutes, an algorithmic trading platform. “In the longer term, the legal and regulatory issues facing the crypto industry will continue.”

Beyond Bitcoin,

Ether
—the second-largest crypto—fell 4% to $1,565. Smaller cryptos or altcoins were also firmly in the red, with

Cardano
and

Polygon
both down 4%. Memecoins saw even deeper losses, with

Dogecoin
dropping 6% and

Shiba Inu
shedding 5%.

Write to Jack Denton at jack.denton@barrons.com