Bitcoin, ether fall after go-to crypto bank Silvergate announces liquidation

Crypto prices fell on Thursday after Silvergate, a bank that has been at the center of the industry’s growth, made a decision to shut down.

Bitcoin rallied 7% to $20,474.50, according to Coin Metrics. Ether lost about the same amount and last traded at $1,440.45.

The slight decline began late Wednesday, a few hours later Silvergate capital announced that it will wind down operations and liquidate its crypto-friendly bank.

The relatively small size of the move indicates that cryptocurrency investors priced in the news last week when the company first warned it might not be able to continue operating and it shut down the SEN, or Silvergate Exchange Network, according to Conor Ryder, research analyst at Kaiko.

However, the decline intensified on Thursday afternoon, after shares in SVB Financial, whose Silicon Valley Bank, which largely banks technology startups, announced a plan to raise more than $2 billion in capital to help offset losses on bond sale. Although SVB has said it has minimal exposure to crypto, the need to recapitalize on the heels of the Silvergate event has linked the two events in some people’s minds.

Bitcoin and Ether have held up relatively well despite a challenging macroeconomic environment – still the biggest driver of crypto price action despite a declining correlation between crypto and stocks – and a series of setbacks for the space, including the recent Silvergate developments and post-FTX regulatory crackdown on the industry that began in February. Even their single-digit drops on Thursday pale in comparison to the 60% and 41% declines of SVB and Silvergate respectively.

Bitcoin’s correlation with stocks is lower than it was for much of 2022, and volatility has been near historic lows in recent weeks.

Thursday’s move pushed bitcoin below the key technical level of $22,200. While some investors have welcomed bitcoin’s latest sideways move in light of a number of negative industry developments, chart analysts have been looking for the cryptocurrency to close above $25,000 to give more meaning to its annual gains, now around 30%.

A drop in liquidity

The end of Silvergate is worrying for the industry, which now expects a decline in incoming flows without SEN or enough reliable alternatives.

Companies have continued Signature bank, whose Signet platform is comparable to Silvergate’s SEN, but the company has already said it plans to limit its crypto exposure in light of recent events. However, the industry will monitor developments, especially after last week’s coordinated effort by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to warn banks about the liquidity risk that comes with banking crypto companies.

“These warnings make it difficult for the largest banks to service the crypto space, as we believe they have concluded that the opportunity is not worth the regulatory risk,” Jaret Seiberg, an analyst at Cowen, said in a note Thursday. “This likely consolidates crypto exposure against a handful of smaller banks, which means more liquidity risk and more concentration risk. That’s the very risk bank regulators are trying to combat.”

If smaller institutions don’t step up, the U.S. risks losing significant market share overseas, Kaikos Ryder said, adding that Europe looks particularly well-positioned to step in thanks to its regulatory clarity in the form of Markets in Crypto-Assets, or MiCA. regulation.

“Our data showed an increase in euro volumes for bitcoin versus the dollar in the past week,” he told CNBC on Thursday. “We have also noticed a drop in liquidity on both USD crypto-pairs and US exchanges as liquidity providers take a wait-and-see approach. In the short term, lower liquidity will lead to more volatility in the markets and larger price increases or decreases.”