Why Bitcoin, Ethereum and Solana are Crashing Today

What happened

Cryptocurrencies have had a rough couple of days as word spread that the influential Silicon Valley Bank, which trades under SVB Finance Group (SIVB -60.41%), is facing a liquidity crisis. While this is not a direct hit to crypto, many venture capital firms use Silicon Valley Bank, so there is a risk of a broader economic impact, which is why cryptocurrencies are down on Friday.

As of 10:30 a.m. ET, Bitcoin (BTC -6.66%) had fallen by 8.5% in the previous 24 hours, Ethereum (ETH -6.85%) had fallen 8.8%, and Solana (SUN -2.50%) was down 5.7 percent. Looking further back, over the past seven days, these cryptocurrencies have declined by 11.2%, 10.7% and 18.5% respectively.

So what

The two major events of the past week have been the collapse of Silvergate Capital and the potential collapse of Silicon Valley Bank. Silvergate provided a direct entry into cryptocurrencies for many wealthy investors and institutions, and even operates many exchange-traded funds. But it was seen as a more crypto-specific bank.

This week’s bank run at Silicon Valley Bank is more concerning for the broader tech ecosystem. It is used by many startups and provides services that small businesses need to scale their businesses quickly.

Contagion, or cascading risk from one device to another, is the biggest fear here. This can lead to less lending and investors withdrawing their investments. Silicon Valley’s venture capital firms fuel the tech ecosystem, and anything that affects them can affect many smaller startups.

In the case of crypto, dozens of blockchain start-ups have been funded by venture capitalists in Silicon Valley. If they face pressure from regulators, banks, and ultimately investors, they may not be able to build the tools and services intended to make cryptocurrencies like Bitcoin, Ethereum, and Solana more useful, and thus more valuable.

In short, these ecosystems are intertwined, and the fear this week is that a collapse of Silicon Valley Bank will make this crypto winter even worse.

What now

The risk to financial institutions cannot be underestimated because they are crucial to making the financial system work. When lending pulls back all of a sudden or there is a credit crunch, it can have an economic impact, as we saw in 2008 and 2009.

The Labor Department’s February jobs report on Friday morning provided some positive news. The U.S. economy added 311,000 nonfarm jobs last month, but more people entered the labor force looking for work, so the unemployment rate rose to 3.6%. So far, the slowdown in the tech sector, the crypto collapse and the fall of some banks have not spilled over into the wider economy.

Investors with a long-term view should start looking at this as a buying opportunity for high-quality cryptocurrencies. Despite the decline in token values, the crypto industry continues to grow and innovate, which is ultimately what is going to drive value.

I don’t know if we are at or near the bottom, but I am betting that innovation in blockchain will win in the long term. The Ethereum and Solana blockchains are where most developers are building and that’s where I look to be a buyer if this crash gets worse.