Why Bitcoin and Silvergate Capital Got Caught in Crypto Crash Today

What happened

The cryptocurrency meltdown has largely continued on Wednesday, and it could get worse. Yesterday, the major crypto exchange FTX faced insolvency problems and its competitor Binance agreed to buy the company. But that has spooked the crypto market and could lead to billions of dollars in liquidations as FTX unwinds positions it has with sister company Alameda Research, which FTX founder Sam Bankman-Fried also owns.

From 3:30 PM ET, Bitcoin (BTC -14.12%) had fallen 7.8% in the last 24 hours to $16,845, Wrapped Bitcoin (WBTC -12.73%) was down 7.8% to $16,824, and Silvergate capital (SAY -12.00%) had fallen a whopping 14.3%, but is now down 9.2% on the day.

So what

FTX’s collapse has had a number of impacts on the crypto market. The first is that liquidating any of these positions would mean selling in an already illiquid crypto market, so values ​​drop quickly.

To complicate matters, reporting from CoinDesk and others indicates that Binance may actually back out of the proposed deal to buy FTX. The companies did not agree to the final terms of an acquisition, but rather a letter of intent that allows Binance to look at FTX’s books and see if they want to move forward. It’s very possible that Binance will back down if it sees something it doesn’t like. This could send the market into further chaos.

Silvergate Capital released a note reiterating that it is regulated in the United States and has both ample capital and the ability to access “Federal Home Loan Bank and Federal Reserve Bank, further strengthening our liquidity position.” Investors and traders are looking for any kind of safety and security right now, so statements like this are being made across the industry.

What now

This is arguably the biggest news in crypto markets ever and it is not clear what the fallout will be. But I will note that this summer crypto investors saw the collapse of Three Arrows Capital, Celsius Network and Voyager and the industry moved on.

Liquidating leveraged positions can lead to losses and the value of tokens can reset lower as the market finds a balance between buyers and sellers, but the crypto market has found its way much faster than traditional banks.

This could also be an event that forces US regulators and lawmakers to act more quickly and write rules that create a firmer playing field for investors and developers. That would be welcome news for the industry.

I don’t think the decline in crypto is done, but it’s not all bad that leveraged traders are being forced out of the market. FTX was once a big name in crypto; now it may be referred to as a cautionary tale of how celebrity and influence can lead to disaster in crypto markets.