Three major banks in the United States, Silicon Valley Bank, Signature Bank, and Silvergate Bank, collapsed in succession within one week, from 7 to 14 March 2023.
Specifically, Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank collapsed on 8, 10, and 12 March, respectively.
These banks were affected by similar circumstances such as the hikes in the Fed interest rates, mismanagement, and exposure to cryptocurrencies.
However, analysts believe that the impact of the exposure to cryptocurrencies on the collapse of these banks was minimal.
Let’s briefly look at the string of events that led to the collapse of each of these banks.
i. Signature Bank
Silvergate incurred a loss of over $1 billion in 2022 as a result of the existing macroeconomic conditions and the implosion of the FTX exchange.
As a result, the bank reduced its staff force by 40%.
To make things worse, the US Department of Justice (DOJ) started investigating it for its financial dealings with FTX.
Further to this, Silvergate Bank missed its 10K filing with the SEC, which sent a bad signal to the crypto market.
In response, several companies including Coinbase, Paxos Trust Company, Circle, and Ledger ended their partnership with Silvergate.
That was followed by a sharp fall in its share price, whose value dropped by 97%, from $219.75 to $5.41.
ii. Silicon Bank
The regulators announced on 10 March that Silicon Valley Bank was closing down.
The main contributing factor to this debacle was its investment in long-dated securities, which include mortgage bonds and U.S. Treasuries.
Due to the Fed’s constant hiking of interest rates, the value of these instruments dropped significantly.
As a result, a week before it closed, the price of its shares plunged by 67%.
In order to shore its balance sheet, Silicon Valley Bank proposed to issue common stock and convertible preferred shares.
When the customers came to know about its financial woes, they lost confidence and withdrew their funds in large numbers leading to a bank run.
iii. Signature Bank
Signature Bank experienced various financial challenges that started when Celsius, which was one of its key customers, closed down.
The implosion of FTX made the situation worse than before.
On the other hand, Statistica Capital, an algorithmic trading firm, filed a lawsuit against Signature Bank accusing it of permitting “the co-mingling of FTX customer funds within its proprietary, blockchain-based payments network, Signet.”
Signature Bank – Livemint
Sadly, after the closure of Silvergate Bank, the stock of Signature Bank nose-dived forcing it to stop trading.
Soon after that, the regulators seized it, leading to its closure.
iv. Credit Suisse
Another development that has created fear in the financial sector is Credit Suisse.
Credit Suisse, a Swiss lender, faced some problems a few days after the above-mentioned United States banks closed down.
Specifically, on 15 March 2023, the value of Credit Suisse shares fell by 20% following Saudi National Bank’s announcement that it would not provide it with any further financial support.
However, the Swiss Government intervened to prevent the collapse of Credit Suisse.
It forced the USB to acquire Credit Suisse for $2.7 billion.
Switzerland’s central bank explained that it intervened to enhance financial stability in the country as well as to protect the Swiss economy.
How Did The Crypto Market Respond?
The prices of major cryptocurrencies rose after the collapse of the three banks in the United States.
For example, the Bitcoin price reached its highest point in nine months. Particularly, between 10 and 17 March, BTC’s trading value increased by 36.06%.
Overall, it gained by 70% since the beginning of the year with its price spiking up to $28,085 a few days after the collapse of the banks.
Basically, Bitcoin and other cryptocurrencies have remained resilient despite the financial turmoil in the traditional financial sector.
In the same period, 10 to 17 March, ETH traded with a gain of 26.67%, attaining a high of US$1,750.
Apart from ETH and BTC other cryptocurrencies fared well during the same period.
As an example, the price of CFX, Conflux Network’s utility token, rose by 105.99%.
Similarly, the price of STX, the utility token of Stacks – Bitcoin’s smart contract layer- increased by 100.13% to close at US$1.09.
Major cryptocurrencies spiked – Freepik
There are several explanations for the rallying of the major cryptocurrency after the closure of the three banks.
One key reason is that the market has realized that Bitcoin and other cryptocurrencies still serve their original purpose, that of being an alternative to traditional finance.
As such, they offer protection against the unexpected fall in the values of fiat currencies.
Crypto investors also anticipate that the Fed will likely take a relaxed stance on interest rates to protect the legacy financial system.
This is because high-interest rates have also negatively affected the crypto market.
There is also a prospect that inflation is likely to fall.
From this perspective, Simon Peters, a crypto analyst at eToro said,
Is Crypto the New Safe Commodity?
The current economic situation and the recent closure of banks as well as falling prices of stocks show that cryptocurrencies remain a safe commodity.
Already, some crypto analysts have pointed out that the recent turbulence in the legacy financial systems indicates that the current bear market is coming to an end.
For instance, a respectable bearish strategist, Morgan Stanley’s Michael Wilson, said that the intervention by Federal Reserve and the Federal Deposit Insurance Corp in the banking sector represents the beginning of the end of the bear market as falling credit availability squeezes growth out of the economy.
However, Wilson still believes that the crypto market may experience some more price volatility.
Although the collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank brought much anxiety in the traditional financial sector and the stock market, it did not affect the crypto sector negatively.
Instead, most major cryptocurrencies gained after their collapse.
According to some analysts, this turbulence in the legacy financial sector indicates that the bear market is coming to an end.