Bitcoin and Ethereum Erase Banking Crisis Losses

Last week proved to be a trying time for the cryptocurrency markets, as investors and traders alike faced one of the bleakest periods so far in 2023. 

The week began with warnings from Jerome Powell regarding higher for longer interest rates and the closure of Silvergate Bank. 

However, the final nail in the coffin came from the collapse of Silicon Valley Bank. As the traditional banking sector was thrown into turmoil – with many liking the event to the financial crisis of 2008 – investors were relieved to hear that the US Government would be stepping in.

• US Government steps in to stem Silicon Valley Bank crisis bleed
• Crypto investors caught offside by Federal Reserve’s hawkish shift
• Crypto-focused Silvergate Bank closes its door for good

US Government steps in to stem Silicon Valley Bank crisis bleed

Silicon Valley Bank, the 15th largest bank in America, collapsed late last week amidst a bank run that was initially sparked by large holes in the company’s balance sheet. 

On Thursday, as the bank struggled to stay afloat, institutional customers began removing funds from the bank’s custody which eventually resulted in withdrawals being denied.

As rescue hopes were abolished, control of the bank was handed over to the FDIC.

The collapse of Silicon Valley Bank hit both traditional finance and the crypto markets equally hard. 

While stocks related to the banking sector nosedived, crypto prices also took a hit due to the bank’s close ties with startups and growth companies.

During the subsequent 24 hours, Bitcoin fell by more than 8%.

Although the number of crypto-focused companies with ties to the bank was not known, investors became increasingly fearful as relationships started to emerge. 

Late on Friday, Circle, the developers behind the USDC stablecoin, announced that $3.3 billion of their funds remained trapped inside the bank. 

As a result, investors quickly began to transfer from USDC into other stablecoins, which caused the stablecoin to depeg. The coin – which should remain pegged 1:1 with the US dollar – fell to an all-time low of $0.90 on Saturday, before recovering to $0.95 on Sunday. 

After a bleak 72 hours, the US government eventually confirmed on Sunday that it would be stepping in to make all depositors of the bank whole. 

While traditional markets slept, crypto markets rallied hard as news of the support filtered through the industry. 

Bitcoin secured a 7% price increase and erased all the losses that it sustained during the week.

Crypto investors caught offside by Federal Reserve’s hawkish shift

Before Silicon Valley Bank hit headlines on Friday, a change in stance from the Federal Reserve was already causing some concern among investors. 

At the start of the year, hopes were high that the Federal Reserve would slow down its interest rate hikes to a modest 0.25% – as inflation appeared to be in decline. 

However, these expectations were dashed when the Personal Consumer Expenditure (PCE) price index for January came in higher than anticipated, sending shockwaves through the markets and causing concerns that the Fed might change its course.

Last week, these concerns were confirmed, as Fed Chair Jerome Powell put a 0.5% interest rate hike back on the table, and suggested that a higher overall interest rate may be necessary. 

Many had expected the Fed to stop at a Federal Funds Rate of 5%. Unfortunately, Powell’s message was clear: prepare for higher interest rates for a longer period of time.

This sudden shift in the Fed’s stance rattled investors and left many wondering what’s next for the markets. According to CME FedWatch, 68% of traders now believe a 0.5% hike is more likely.

All eyes are now focused on Consumer Price Index (CPI) and Producer Price Index (PPI) figures that will be released this week on the 14th and 15th of March respectively. 

These are the final inflation proxies before the Federal Reserve makes its next interest rate decision on March 22nd. 

Crypto-focused Silvergate Bank closes its door for good

Last week brought another blow to the cryptocurrency industry in the form of the voluntary shutdown of Silvergate, which sent shockwaves through the markets. 

After rumors had been circulating for a week about the bank’s liquidity, Silvergate announced in a statement that it would be shutting down permanently. 

As a result of the bank run that had ensued during the previous week, the bank now plans to voluntarily shut down operations and liquidate. 

Although the move was not entirely unexpected – the bank had already started selling assets at fire sale prices – the reaction from the crypto market was not mild.

Prior to the collapse of Silicon Valley Bank in the traditional banking sector, Bitcoin and Ethereum had already sustained weekly losses of 2.5% and 2% respectively. 

Many are now concerned that the shutdown of Silvergate may dissuade other financial institutions from getting involved in the crypto industry. A setback that may take some time to recover from.

Silvergate had provided a key bridge between traditional financial institutions and the world of crypto. A bridge that now needs to be partially rebuilt. 

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