Silicon Valley banking crisis is a ‘Cyprus moment’ for Bitcoin: Crypto watchers

The collapse of Silicon Valley Bank (SVB) is a boon for bitcoin (BTC), crypto watchers said, drawing parallels with the 2013 Crypus crisis that highlighted the flaws in the fractional reserve system and drew attention to decentralized, censorship-resistant BTC as a hedge. against centralized banking.

“Silicon Valley Bank, the 18th largest bank in the nation, collapsed yesterday – with it we learn how last year’s record sell-off in US Treasuries has created billions of dollars in unrealized losses in the banking sector and provides yet another example that in a system of fractional reserve bank, there are no depositors, only lenders,” said researcher Nik Bhatia and market analyst Joe Consorti in the latest edition of The Bitcoin Layer newsletter.

“The Fed’s aggressive interest rate hikes and balance sheet reductions have caused a historic banking failure – designing a real-time Bitcoin self-storage ad,” Bhatia and Consorti added.

The crisis at SVB began early last week after the startup-focused bank sold a portfolio consisting primarily of US government bonds or government bonds at a loss and announced a share sale to strengthen its balance sheet. Treasury bond prices have fallen over the past year thanks to the Federal Reserve’s (Fed) aggressive rate hike campaign to control inflation. (Bond prices and interest rates move in the opposite direction).

What followed was a good old-fashioned bank run as SVB depositors scrambled to withdraw funds, with total deposits totaling $42 billion on Wednesday — nearly 25% of the total deposit base of $173 billion.

Bank runs occur because fractional reserves require lenders to maintain only a small portion of deposits available for withdrawal while the rest is lent out to drive economic activity. The system assumes that at a given time the withdrawal requirement will not exceed the pain limit. However, the assumption goes up in smoke when the customers’ trust, as it did in SVB’s case, leads to a peak in withdrawals and a lack of liquidity in the bank.

Regulators usually step in after bank runs, seizure or takeover of deposits. Indeed, the solution to the 2013 Cyprus banking crisis involved regulators raiding customer accounts. Germany coughed up around $13 billion in exchange for Cyprus levying a one-time tax on bank deposits to raise another $7.5 billion to complete the banking sector bailout.

In SVB’s case, American regulators took control of the deposits and shut down the bank on Friday. Over the weekend, the Biden administration announced that all SVB depositors could access their funds starting Monday. The announcement came as another New York-based lender, Signature Bank (SBNY), also failed, a sign of rapidly spreading panic in the banking sector.

Although measures taken to address the SVB crisis are not as draconian as those taken for Cyprus, the whole episode underscores the point that customers’ funds are not as safe in regulated banks as we have been led to believe. This point validated bitcoin’s appeal as a decentralized peer-to-peer network and seizure-resistant cryptocurrency that facilitates self-custody of funds.

“Not your keys, not your coins is a lesson that apparently needs to be learned again and again as history finds ways to repeat itself,” said Mike Fay, author of Blockchain Reaction, in the latest article on Seeking Alpha, discussing investor. takeaway from the collapse of SVB and Silvergate Capital and the 2013 Cyprus banking crisis.

“It is very easy to sit comfortably in the Western world with the perception of safe and regulated banking institutions and not understand why anyone would feel compelled to buy assets that live outside that world. But history shows that banks are capable of doing bad games or bad games. decisions,” Fay added.

Bitcoin surged as the banking crisis in Cyprus unfolded in March 2013. The cryptocurrency surged 178% to $93 that month and reached a record high of $265 in May 2013. At the time, there were reports of owners of euros and Russian rubles diversifying into bitcoin after to have seen bank closures in Cyprus.

“Ten years ago this week, there was a bank run in Cyprus, where ATMs were emptied and vaults were emptied. This event triggered the biggest rally (in percentage terms) of all time in BTC, which rose from $45 to $260 in a month,” crypto trading giant Cumberland tweeted early Monday.

Coincidentally, bitcoin has rallied over 15% since Friday, rising from a two-month low near $19,500 to $22,500, CoinDesk data shows.

“When traders are uncertain about crypto prices, they flee to stablecoins and bank deposits. When they are uncertain about stablecoins and bank deposits? It’s crypto’s time to shine, with BTC and ETH rising 14% and 15% respectively over the weekend amid uncertainty. i the banking sector,” noted Cumberland.

“History doesn’t always repeat itself, but it often rhymes,” Cumberland added.