Broken Banks Silvergate and SVB Put Pressure on Crypto, Leaders End Week Down 10%

Two high-profile bank closures are wreaking havoc on the cryptocurrency market, with leading token bitcoin and ether down nearly 10% each week as concerns mount about a liquidity shortage for the industry.

“US crypto exchanges are suffering the most in terms of liquidity,” says Conor Ryder, research analyst at Paris-based research firm Kaiko. Bank deposits that helped fund crypto in US markets are dwindling and investors are “taking a wait-and-see approach” as crypto companies look outside the US 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 nearly $3 trillion in the fall 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 stocks as investors avoid risk in the face of rising interest rates engineered by the Federal Reserve, said Joy Yang, head of index product management at crypto research firm MarketVector.

“As investors and traders have more confidence in Fed moves and market outlook, we should expect to see a renewed focus on fundamentals and growth assessments,” she adds.

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

Niche lenders like Silvergate and SVB, which targeted specific clients in the crypto and tech world, are more likely to be affected by industry shake-ups, said Hany Rashwan, co-founder and CEO of crypto investment firm 21Shares. “Obviously, when the underlying industry suffers, there are going to be exaggerated setbacks.”

Silvergate Bank announced it would wind down operations and liquidate its assets on Wednesday, a week after it delayed its annual financial report and caused a number of customers to withdraw money.

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

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

The Federal Reserve has set short-term interest rates that were lowered to zero to deal with the Covid-19 pandemic. The easy policy is the likely cause of increased inflation which the central bank is trying to combat, even at the risk of limiting economic growth.

That would be problematic at the best of times, but the crypto industry is dealing with the aftermath of a series of bankruptcies last year and a backlash from Washington against the lack of investor protections for digital assets. Silvergate, which specialized in transferring funds to and from crypto companies, was the flashpoint, dealing with evaporating deposits by selling bonds it held for less than it paid. That led to large customers pulling their money out of the bank, and the decision to close appears to have caused concern for SVB, which announced a massive sale of securities to shore up liquidity.

“Major banks have a disincentive to take on crypto firms’ deposits because of the level of attendant risk they carry,” adds Ryder.

A significant but shrinking crypto business has also hurt Signature Bank, whose shares traded down 22% on Friday despite saying 18.5% of deposits came from customers with exposure to digital assets. That brought the decline for the week to 37.5%.

As banking woes weigh on cryptocurrencies, bitcoin fell below $20,000 in Friday trading to $19,998 late in the day, according to Nomics. This week marked 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 penalized after a 51% plunge in Huobi on Thursday night in New York. It went to $2.31 from $4.73 within minutes before stabilizing and was trading Friday afternoon at $3.90, down 21.8% for the week.

Sun said the huobi decline came from “leveraged liquidation” by “a few users,” before announcing on Twitter that he had set up 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 of 10% and 6%, according to Nomics.

President Joe Biden also added to the pressure on the digital asset market, releasing a proposal on Thursday for a 30% tax on the use of crypto mining. The effect paled in comparison to the macroeconomic news, according to Rashwan.

“We face a long year,” he adds. “There is still further damage that can be caused in the broad economic and political sphere” that could continue to hurt risky assets like cryptocurrencies, he says.