Why Bitcoin, Ethereum and Dogecoin appeared on SVB Rescue Rumors

What happened

The stock market may be closed this weekend, but crypto markets trade 24/7, so this is where we see the market reaction minute by minute on Silicon Valley Banks (SIVB -60.41%) collapse and potential rescue this weekend. Crypto values ​​collapsed from Thursday when the bank run began, but sentiment has changed in recent hours.

Between 1:00 PM and 3:00 PM ET, Bitcoin (BTC 3.79%) jumped 4.1%, Ethereum (ETH 5.13%) went up 5.1%, and Dogecoin (DOGE 4.98%) was up 3.2 percent. That’s a big increase in a couple of hours, but it might be justified today.

So what

As ironic as it may seem, the crypto market is reacting to the potential bailout of Silicon Valley Bank’s depositors, which could have been frozen out of billions of dollars in assets on Monday, potentially starting a bank run across the US. centralized financial market crypto was meant to escape from. But in reality, cryptocurrency has been much more correlated with risky assets than it has been a hedge.

Crypto assets began to emerge as bids for Silicon Valley Bank came in from potential buyers and reports began to emerge that the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are considering protecting all uninsured deposits. The fear is that if deposits are lost, it will lead to customers withdrawing deposits from other small and regional banks, which could collapse the financial system.

As I write, there is no resolution to the situation, but the crypto markets are reacting as if a deal is imminent. By Monday morning, we will find out whether a buyer has emerged or regulators will somehow save deposits.

What now

The risk to the financial system is very real if banks start to collapse, but this is an opportunity for investors to take a long-term view. Unlike in 2008 and 2009, Silicon Valley Bank failed not because it made bad loans, but because depositors pulled out $42 billion in assets in one day. No bank could handle it. And if regulators come up with a solution to keep depositor money safe, that will ease market fears.

As for crypto, I think this event highlighted what a risky asset it still is. Many have claimed that crypto solves risks in the financial system, such as banks failing and firms not handling systemic risk, but the reality is that the crypto market plummeted when a medium-sized bank failed.

If you are invested in crypto as an alternative to traditional currencies, this episode may make you think twice about the crypto investment thesis. But I think the real value here lies in the blockchain and the business models that blockchain technology can unlock. As a result, I see the recent drop as a buying opportunity for crypto. But we can all recognize that systemic risk still affects cryptocurrencies in a crisis like this.