Crypto is still alive, but US banks are shaking

The unprecedented injection of liquidity into the market by the Federal Reserve during this period was an attempt to stimulate an ailing economy.

But before that, crypto, which followed the movements of the stock market closely, went into a downward spiral soon after. Bitcoin crashed from $8,000 to $3,750 in a matter of hours.

It was the “loaded” retail and amateur players who drained crypto and meme stocks as the markets recovered. Eventually, the asset class rose to new heights in 2021. While dramatic peaks and withdrawals of over 80% are not out of the norm, the latest bull run managed to capture the attention of investors, both large and small, like no other.

Several public companies made significant investments in crypto. Overall, it was a record year for space. Although most of these gains have been wiped out, recent events in the banking sector cannot fail to point out how the tables have turned.

Fall of banks and financial system

The now collapsed Silicon Valley Bank (SVB) made that of Forbes magazine’s annual ranking of the best banks in America. Not once, not twice, but for the fifth year in a row. It was also featured in the first Financial All-Stars list.

But not long after that, everything came crashing down. Regulators took control of the bank after it failed to meet demands for withdrawals from depositors. It is worth noting that SVB was the 16th largest lender in the US, with around $200 billion in assets, and had been in business for 40 years. It was considered a reliable source of funding for technology startups and venture capital firms.

While its financial position deteriorated over several years, the day SVB announced plans to clean up its balance sheet was the same day Silvergate imploded. The latter made the same mistakes as SVB, which was enough to frighten the startups that were knocking with the giant.

The shutdown has dragged down international banking shares. The failure of SVB Financial Group and the other entities shortly afterwards indicates the pervasive risk to the financial system. Regulators definitely have some explaining to do.

The fragility of centralization: Around 2023

Banking authorities in the United States, be it the Treasury Department or the Federal Deposit Insurance Corporation (FDIC), have vilified the crypto industry as a threat to the country’s financial system.

But they failed to point to a much larger problem stemming from these legacy institutions. Silicon Valley Bank, for one, has had a relatively small footprint in the crypto industry, and its epic collapse shows that regulators’ fixation on cracking down on crypto may be a misplaced priority.

This begs the question, is fiat that fragile? Did the structure of the traditional financial system sow the seeds of instability? The jury is out on that.

Although it is still too early to say whether the rot will spread to other banks as well discussions around “the practicalities of decentralisation” has never been higher. And three years after the COVID crash, crypto is still here. It has expanded like never before.