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Silicon Valley Bank exposure: what does this mean for cryptocurrency

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During the first quarter of 2023, March 10th, to be exact, regulators closed the doors to the Silicon Valley Bank (SVB). That would be one of the first bank runs in 15 years since the 2008 financial crisis.

Would SVB had collapsed if it had paid attention to some of the most basic rules of investing or at least followed the lead of other top banks like JPMorgan Chase, Wells Fargo, Citigroup, or Bank of America?

What’s the big Silicon Valley Bank exposure?

Silicon Valley Bank is one of the top lenders in the tech startup industry. But before that, it is one of the largest banks in the U.S. Its headquarters are in Santa Clara, California, and lately, it has provided financial services to technology companies.

Venture capital and private equity firms have also been beneficiaries of the bank’s goodwill. SVB is fairly popular for these risky investments.

For instance, Silicon Valley bank had $200 billion of customer deposits in their clutches towards the end of April 2022. Some of the money went into rewarding and low-risk investments like Treasury bonds and mortgage-backed securities. While a bulk of it was sunk into tech and one renowned stablecoin.

But here’s how this was the straw that broke the camel’s back.

Remember how Silicon Valley Bank invested in treasury bonds and mortgage-back securities? These choices contributed to the domino effect that preceded the fall of SVB. For that matter, many things caused the fall of the Silicon Valley Bank.

For starters, no one can ignore the rising prices of consumer products. It’s a result of inflation, which the U.S. central bank or Federal Reserve is trying to contain. If you don’t already know, inflation is an economic concept. It means people must spend more, but they will get less.

Do you know why?

Economists constantly study these trends, and they say it’s because of higher production costs. If more people are also willing to pay more for the product, the price equally increases.

The Federal Reserve has stepped in and is controlling the situation by raising interest rates. This will affect the borrowing ability of people, thereby reducing the amount of money in circulation and controlling demand.

As you can see, this is bound to affect a bank because these financial institutions rely on people’s money. One of their primary funding sources is the net profit margin (P.S. this is a significant banking concept, but you don’t need to worry about it.)

Therefore, central banks have chosen to offset the effects of the inflation by raising interest rates, but it affects every sector.

There will be less borrowing capability, which means less income, and Silicon Valley Bank is very much at the receiving end. Not only that, but the bank also invested in treasury bonds and mortgage-backed securities. Again, these options are tied to consumers’ ability to borrow more money.

Unfortunately, the bank was unprepared for the Central bank’s anti-inflationary measures and is currently suffering the consequences.

Not much has been said about the fate of SVB, but regulators have saved the day to an extent. They have stopped a bank run that could have ended worse off for SVB.

Still, on the causes of the Silicon Valley Collapse, the pandemic and its ending is also a part of this intriguing story.

During the pandemic, tech startups were the rage. Their services came in super handy because we had to work from home.

But now, demand for tech is back to normal from its previously high side.

Many of these tech companies rely on funding from SVB to finance projects and pay their workers.

What’s to happen now that their source has run out?

For those that were able to cash in enough cash to pay their employee’s most recent monthly salary, good for them. The next step is to pause projects and investigate other funding sources.

This is also a halted income source for SVB, as this potential investment sector is also seeing some economic setback.

In a nutshell, a host of factors caused the Silicon Valley Bank rundown.

But most importantly, the speed and urgency with which customers withdrew funds drove the final nail in the coffin.

What cryptocurrency companies were affected? Actually, just one.

What cryptocurrency companies were affected? Actually, just one. The most prominent victim from the cryptocurrency industry is a company called Circle.

It is the creator of a stablecoin called USDC.

Circle is valued at $40 billion. But the company announced the day after the SVB doors closed that $3.3 billion was stuck in the SVB debacle.

This caused the value to drop to $0.89 from its $1 peg. But luckily for the crypto industry, the stablecoin is now back to normal. Circle is the only cryptocurrency firm that’s affected.

Other titan exchanges and cryptocurrencies, including Binance, Tether, and Gemini, claim they had no relationship with Silicon Valley Bank or Silvergate Bank.

So, customers, through their deposits, were the primary victims of what we hope is a temporary glitch.

But what does all of this mean? Is your money safe in a traditional bank after what happened with Silicon Valley Bank and Silvergate Bank?

Actually, yeah. Different banks adopt different strategies, and we can all agree that SVB went overboard and broke a simple rule.

Never put all your eggs in one basket. Banks diversify their investments in different sectors, while SVB focuses on the tech industry and startups. For some reason, SVB failed to see that these segments could collapse for any reason.

Have you ever heard of a stress test? Where banks are concerned, it’s an assessment the Federal Reserve conducts. The test checks that a bank has enough capital in an emergency. With enough capital, that bank must be able to return customer deposits on demand without losing its ability to continue servicing loans.

The big banks adhere to these rules. SVB collapsed because of its investment strategy. It probably made a lot of wrong choices in 2022, and the results have come in March 2023.

In terms of investing in anything, unless you’re a high-risk investment type, never put in more than you can afford to lose. Also, diversify your portfolio. That’s a must.

That being said, what does this mean for cryptocurrency?

The Silicon Valley Bank collapse certainly shook the crypto industry. The banking system of America is also affected. If regulators did not step in to save the show on March 10th, SVB would have been run to the ground by bank runs.

As I mentioned already, Circle is the only major cryptocurrency firm that’s a victim of SVB’s wrong choices. This warns cryptocurrencies to become more deliberate about their partner companies and financial institutions.

On the other hand, banks should constantly remain cautious of their investment choices. It would be better if they could consider or prepare for recessions, inflations, and changing interest rates.

They’d best prepare for a bank run too.

Finally, for investors, this is another warning. Of course, the prospect of growing your funds in the budding cryptocurrency sector sounds fun and doable, but you must go in prepared.

With a small capital, invest only in viable projects. Don’t expect to get rich overnight through crypto – most blockchain projects and the returns are futuristic.

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