Why Bitcoin, Ethereum, and the Shiba Inu Are Falling
Many cryptocurrencies continued to slide on Friday as investors digest the fallout from the crypto bank Silvergate capital (NYSE: SI) and evaluate its ability to remain in business.
The price of the world’s largest cryptocurrency, Bitcoin (CRYPTO: BTC), is trading 4.3% lower than late yesterday afternoon from 10 ET today. The price of the world’s second largest cryptocurrency, Ethereum (CRYPTO: ETH)is about 4.1% lower, while the price of the meme token Shiba Inu (CRYPTO: SHIB) is down 5.8 percent.
So what?
After the market closed on Wednesday, Silvergate filed a filing with the Securities and Exchange Commission (SEC), saying it would have to delay filing its annual report as it analyzed the impact of several events on its business.
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Silvergate operates a real-time US dollar payment network that crypto exchanges and institutional traders use to better facilitate crypto transactions. The network is very useful for the crypto ecosystem because cryptocurrencies are traded around the clock and the US banking system operates with a lag.
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But the scandal-ridden bankruptcy of FTX, which had been a major client of Silvergate, led to a bank run, and Silvergate saw nearly 70% of its digital asset-related deposits leave the bank in the fourth quarter of 2022. The bank had to sell a large portion of its bond portfolio its, while it was trading at a loss, to cover the expiration of deposits, wiping out a large part of its equity. Furthermore, many investors believed that Silvergate could face some serious regulatory action due to its relationship with FTX, and media outlets have reported that the US Department of Justice is looking into the bank.
In its filing with the SEC, Silvergate said it continued to sell bonds at a loss in January and February, and that capital levels may now be below regulatory requirements as a result. Silvergate is also currently assessing the impact of regulatory inquiries and investigations into the bank. All this has caused the bank to assess its “ability to continue as a going concern”.
On Thursday, some of Silvergate’s major customers, such as Coin base (NASDAQ:COIN), announced it would stop using the bank, and Silvergate’s stock fell a whopping 58% and is down nearly another 11% Friday, trading around $5 a share. Although most cryptocurrencies fell on Thursday, they held up decently given the news. On Friday, however, investors seem more concerned.
“The bearish turn could certainly be a delayed reaction to Silvergate’s ongoing problems,” said Clara Medalie, director of research at Kaiko, according to CNBC. “Many major exchanges and market makers work with Silvergate for fast transactions between entities, and any stoppage in activity could have an impact on global crypto liquidity.”
“Additionally, there are now broader concerns in the industry that US regulators are trying to cut further banking relationships between crypto firms and FDIC-insured banks,” Markus Thielen, head of research at digital asset platform Matrixport, told Cointelegraph.
What now?
Federal banking regulators have issued several statements warning banks about the risks associated with certain crypto activities, and another major crypto bank, Signature bank (NASDAQ: SBNY)has also scaled back its crypto activities.
The news is of interest to the entire industry because services provided by Silvergate help exchanges, traders and others easily change dollars to crypto and vice versa.
I still think the biggest cryptocurrencies, like Bitcoin and Ethereum, will be here for a long time and that people will continue to be able to exchange them for fiat currencies. However, I have no interest in meme tokens like Shiba Inu right now.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner that provides financial news, analysis and commentary designed to help people take control of their financial lives. The content is produced independently of USA TODAY.
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