Silicon Valley Bank: Why It's Not So Bad For Crypto
As reported earlier by BCCN3, the Silicon Valley Bank (SVB) collapse has added more fuel to the fire as crypto and the web3 industry continue to struggle after a tumultuous 2022. The sudden collapse of SVB has already caused major disruptions in cryptocurrency including the de-pegging of USDC which was originally perceived as one of the most reliable stablecoins available.
However, the situation might not be as bad as originally thought. Unlike FTX, SVB did not go under because of poor financial responsibility and illicit activity, giving hope to many crypto investors who have been burned too many times over the past year.
Instead, the collapse can largely be attributed to wider issues in the U.S. economy involving rising interest rates and inflation; and while these are not good things, the response from the U.S. market suggests that everything is under control.
Rising interest rates caused a bank run
The key difference between SVB’s collapse and other failures in cryptocurrency is that the event was caused by a bank run on SVB instead of any inherent failure in cryptocurrency itself, and the bank run was initially caused by rising interest rates by the Federal Reserve to combat high inflation.
Unfortunately, rising interest rates caused many of SVB’s assets to lose value and become higher risks. As the situation grew worse, SVB was forced to announce that it would be selling off securities and $2.25 billion of its own shares to keep the balance sheets in order.
However, this announcement caused many venture capitalist firms to begin pulling assets out of the bank which caused a frenzy of other investors to do the same, resulting in a bank run that forced the FDIC to shut down the bank.
Silicon Valley Bank was illiquid
As with many banks, a large majority of the SVB’s assets were locked up in U.S. bonds that required six years to sell which is a major reason for the bank’s collapse. However, this is not abnormal for a bank. Investing assets into Government bonds are considered routine in the financial industry.
The issue though is that no one is willing to wait 6 years for their assets to be returned to them. Further, as interest rates continued to rise, many of these bonds began to lose value which compounded the issue further.
Still better than FTX
It’s important to note that this event does not represent another failure in crypto as we’ve all become accustomed to. It’s a reflection on the current state of the U.S. economy which has been struggling to combat inflation since the Covid-19 pandemic first began.
Although many people are being negatively affected by this collapse, there is still space for crypto investors to breathe a sigh of relief. Unlike the collapse of FTX, which was revealed to be a Ponzi Scheme, SVB was simply caught in the crossfire of a more general economic issue related to inflation.
Bitcoin and other crypto prices rebounded
Fortunately, it appears that crypto has been reacting positively to the issue following a brief moment of panic when prices of nearly everything dropped over the weekend. However, since then, the price of bitcoin and many other cryptocurrencies has risen with bitcoin especially proving its worth as a decentralized currency that can’t be lost by a bank.
In fact, it seems many retail investors in the crypto space are starting to see the value of bitcoin and why it remains the bedrock of all cryptocurrencies despite its lack of utility.
Decentralization serves a purpose, protecting people from banking collapses and giving them full custody of their assets. With SVB’s collapse, this has only become clearer and could hint at a new wave of speculation for bitcoin.
