Crypto Is Now Geared For A Massive Fed Bomb After Silicon Valley Bank Meltdown Caused Price Chaos For Bitcoin, Ethereum And USDC
03/13 update below. This post was originally published on March 11
BitcoinBTC, ethereum and other major cryptocurrencies are braced for extreme volatility after Circle’s $43 billion USDCUSDC stablecoin lost its US dollar peg – capping a wild week for crypto.
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03/13 update: Bitcoin and crypto markets have rebounded after the US government said it would step in to prevent a potential banking crisis from spreading. The price of bitcoin and ethereum has made up ground lost since Friday, while Circle’s USDC stablecoin has regained its dollar peg.
“Bitcoin faces an important test of market sentiment,” Alex Kuptsikevich, senior market analyst at FxPro, said in emailed comments. “During the day we have to watch carefully to see if we have a clean sale of the hawks. If so, it is an important signal that the last posting was fake and that the big players are still selling at better prices. Potential buyers would still be better to wait for a resolution above $23,000 to confirm a bullish reversal.
The Bitcoin price pullback was triggered by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) announcing on Sunday that all deposits from Silicon Valley Bank (SVB) would be protected after the bank failed. The contagion had already spread to New York-based, crypto-friendly Signature Bank.
A joint statement from the Federal Reserve, the Federal Depository Insurance Corporation (FDIC) and the US Treasury Department said all depositors who used Signature Bank would be made whole. “We are also announcing a similar systemic risk exemption for Signature Bank, New York, New York, which was closed today by the State Chartering Authority. All depositors of this institution will be made whole. As with the decision of Silicon Valley Bank, No. Losses will be borne by the taxpayer,” the joint Fed/FDIC/Treasury statement said.
The crisis at Silicon Valley Bank last week was partly triggered by the Federal Reserve’s program of rate hikes over the past 12 months as it battles to drive down skyrocketing inflation. Last week, Fed Chairman Jerome Powell said he expected interest rates to rise higher than the market expected. However, the market now expects the meltdown at Silicon Valley Bank to force the Fed to halt its rapid rate hike program.
“Clearly, continued hikes risk further destabilizing the financial system, so the time at which the Fed would have to pause and then pivot could have been moved closer by the events of last week,” Marcus Sotiriou, crypto market analyst at digital asset broker GlobalBlock, said in an email – postal message.
Silicon Valley Bank was forced to start selling the government bonds it had bought in recent years at a loss to cover a wave of withdrawal requests. The value of the bonds had fallen when the Fed raised interest rates.
Bitcoin price has dropped 10% this week due to the failure of crypto-friendly bank Silvergate, wiping $100 billion from the combined crypto market as the price of top ten cryptocurrencies ethereum, BNBBNB, XRPXRP, cardano, dogecoin, polygon and solana go in free fall.
Now the crisis at startup lender Silicon Valley Bank (SVB), where stablecoin issuer Circle held a portion of USDC cash reserves, threatens to wipe out the second largest stablecoin by market capitalization.
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“Silicon Valley Bank is one of six bank partners that Circle uses to manage the ~25% portion of USDC reserves held in cash,” Circle posted to Twitter, exacerbating a nearly 10% drop from its peg to the US dollar. “While we await clarity on how the FDIC receivership of SVBVB will affect depositors, Circle and USDC continue to operate as normal.”
Circle has $3.3 billion of the $40 billion backing their stablecoin deposited with SVB. SVB deposits of up to $250,000 are guaranteed by the Federal Deposit Insurance Corporation (FIDC), potentially leaving Circle and other depositors out of pocket.
“FIDC deposits are only insured up to $250,000, and when there is a bank run, depositors can lose,” said Markus Thielen, head of research and strategy at Matrixport, in an emailed statement.
In a further blow, major US crypto exchange CoinbaseCOIN, which issues USDC through a joint venture with Circle, announced that it has suspended USDC conversions for US dollars, posts to Twitter it would “temporarily” pause conversions while banks are closed over the weekend.
“Circle is currently protecting USDC from a black swan failure of the US banking system,” Circle chief strategy officer Dante Disparte wrote on Twitter. “Silicon Valley Bank is a critical bank in the U.S. economy, and its failure — without a federal bailout — would have broader implications for business, banking, and entrepreneurs.”
California-based SVB was taken over by regulators and shut down on Friday after panic spread among depositors who withdrew about $40 billion from the bank and efforts to raise new capital failed.
The bank’s woes are believed to have started when the US central bank began raising interest rates last year, wiping out the value of mortgage bonds and US Treasuries. This week, Fed Chairman Jerome Powell told lawmakers that he sees interest rates rising ahead of market expectations this year.
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Meanwhile, Circle’s banking woes, contributing to the crypto crisis triggered by the collapse of Silvergate earlier this week, have sent bitcoin transaction fees soaring as traders frantically try to secure their crypto.
“Bitcoin network transaction fees are very high and indicate panic,” Thielen said, adding that the largest stablecoin tether has managed to keep its dollar peg for now.
“From the three major stablecoins, we now have one standing, and of course it’s the major one. Tethers USDTUSDT which has been out of the Paxos-Binance BUSDBUSD storm in February and is also now weathering the Circle USDC storm.”
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