Broken Banks Silvergate And SVB Put Pressure On Crypto, Leaders End Week Down 10%

Two high-profile bank closings are causing havoc in the cryptocurrency market, with leading tokens bitcoin and ether down almost 10% for the week each as concern grows of a liquidity shortage for the industry.

“U.S. crypto exchanges are suffering the most liquidity wise,” says Conor Ryder, research analyst at Paris-based research firm Kaiko. Bank deposits that helped fund crypto in U.S. markets are dwindling and investors are “taking a wait-and-see approach” as crypto companies look outside the U.S. for banking partners.

The crypto market, now valued at $964 billion by CoinGecko and $931 billion by CoinMarketCap, has been hit by the closure of crypto-friendly banks Silvergate and Silicon Valley Bank (SVB
VB
). The market is down from $1.1 trillion last month and almost $3 trillion in the autumn of 2021, before the downturn known as crypto winter took hold.

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Macroeconomic pressures are also driving the decline in crypto prices and related equities as investors shun risk in the face of rising interest rates engineered by the Federal Reserve, says Joy Yang, head of index product management at crypto research firm MarketVector.

“As investors and traders have more confidence in Fed movements and market outlook, we should expect to see a refocus on fundamentals and growth valuations,” she adds.

These considerations affect banks across the board. The KBW Nasdaq Bank Index lost 16% for the week.

Niche lenders like Silvergate and SVB, which targeted specific customers in the crypto and tech worlds, are more likely to be affected by industry shakeouts, says Hany Rashwan, co-founder and CEO of crypto investment firm 21Shares. “When that underlying industry suffers, there are obviously going to be exaggerated blowbacks.”

Silvergate Bank announced it would be winding down operations and liquidating its assets on Wednesday, one week after it delayed its annual financial report and caused a flurry of clients to withdraw funds.

SVB, the preferred banking partner for many Silicon Valley startups and venture capital firms, including giants Andressen Horowitz and Sequoia Capital, was shut by the California Department of Financial Protection and Innovation on Friday. The move came after the bank sold off a $21 billion bond portfolio to raise liquidity, sending its stock plummeting 64% in pre-market trading. The shares were halted before the regular session began and never reopened.

“SVB is a good indication that this wasn’t necessarily a crypto specific issue, but rather a case of traditional banks taking on too much risk with their long-duration bonds, which have been hit hardest by rising rates,” adds Ryder.

The Federal Reserve has been raising short-term interest rates that were lowered to zero to cope with the Covid-19 pandemic. The easy-money policy is the likely cause of elevated inflation that the central bank is seeking to combat, even at the risk of limiting economic growth.

That would be problematic in the best of times, but the crypto industry is dealing with the aftermath of a string of bankruptcies last year and a backlash from Washington against the lack of investor protections for digital assets. Silvergate, which specialized in transmitting funds to and from crypto companies, was the flashpoint, and it dealt with evaporating deposits by selling bonds it held for less than it paid. That led big customers to pull their money out of the bank, and its decision to close seems to have raised worries about SVB, which announced a massive sale of securities to bolster its liquidity.

“Bigger banks have a disincentive right now to take on crypto firms’ deposits due to the level of accompanying risk they bring,” adds Ryder.

A sizable but shrinking crypto business also has tainted Signature Bank whose shares were trading down 22% on Friday despite its statement that 18.5% of deposits came from clients with digital-assets exposure. That brought its decline for the week to 37.5%.

As the banking issues weigh on cryptocurrencies, bitcoin slipped below $20,000 on Friday trading at $19,998 late in the day, according to Nomics. This week was the first time the original crypto traded below $20,000 since January. Ether also fell 1% to $1,420.

Coins associated with billionaire investor Justin Tron were punished after a 51% plunge in huobi Thursday evening in New York. It went to $2.31 from $4.73 in a matter of minutes before stabilizing and was quoted on Friday afternoon at $3.90, down 21.8% for the week.

Sun said the huobi decline came from “leveraged liquidation” of “a few users,” before announcing on Twitter that he had created a $100 million fund to stabilize huobi, without specifying the source of the money.

Tron and just, also in Sun’s sphere of influence, were off 10% and 6%, according to Nomics.

Also contributing to the pressure on the digital assets market, President Joe Biden released a proposal on Thursday for a 30% tax on crypto mining usage. The effect paled in comparison to the macroeconomic news, according to Rashwan.

“We’re in for a long year,” he adds. “There’s still additional damage that could be caused in the broad economic and political sphere” that could continue to hurt risk assets like cryptocurrencies, he says.