Key Takeaways:
- Following the collapse of a high-profile Silicon Valley bank, the price of the world’s largest cryptocurrency by market capitalization has skyrocketed.
- Bitcoin has climbed over 55% so far this year and is in touching distance of the highest level since June 2022
- Concern over the possible lack of stringent oversight has been expressed by financial experts, lawmakers, and former government officials.
- Following the recent upheaval in the U.S. financial system, cryptocurrency exchanges and wallets have grown in popularity as people search for bankless alternatives.
When did it all start looking like an economic crisis for the U.S.?
The world’s biggest economy, with a GDP of more than $20 trillion, would never have predicted such a disruption in its banking system. It started with Silicon Valley Bank, the 16th biggest lender, and within hours, lenders like Signature Bank and Silvergate joined likewise.
Over the past week, three banks — Silvergate Capital, SVB Financial’s Silicon Valley Bank, and Signature Bank — failed. In order to maintain liquidity, Swiss bank Credit Suisse had to borrow 50 billion Swiss Francs from Switzerland’s central bank this week due to strong selling pressure.
Additionally, First Republic Bank is contemplating a sale as a result of a sharp 60% decline in its stock price over the previous week. The Federal Reserve and JP Morgan Chase both provided the bank with emergency funds totaling $70 billion.
A $30 billion rescue package for First Republic Bank was announced by 11 of the largest U.S. banks on Thursday in an attempt to keep it from failing for the third time in less than a week and stave off a wider banking crisis.
The possibility for inadequate regulations has now alarmed financial experts, lawmakers, and previous government officials. Some have blamed the Fed, the country’s supervisory central bank, claiming it should have examined the financial records of SVB, which expanded rapidly during the pandemic as the tech sector increased.
Others have expressed worry that prior efforts to reduce regulation, implemented under President Donald Trump, have left laws and political environments vulnerable to neglect.
Treasury Secretary Janet L. Yellen testified before lawmakers on Capitol Hill on Thursday that additional investigation was necessary. She pointed out, “I believe we must look deeper into the oversight bodies — to exactly what transpired that led to the challenges that these two banks that collapsed faced — and make sure that our legislative system in oversight is effectively directed so that banks oversee their risks.”
The silver lining to the current crisis comes as cryptocurrency markets have been rising over the past week, with Bitcoin trading worth one of the biggest gainers, rising 14% to about $24,700 since Silvergate closed.
It is worth noting that Silvergate and Signature operated real-time payment platforms primarily used by cryptocurrency exchanges and other crypto clients. Meanwhile, SVB had funded a slew of cryptocurrency startups.
What does the Bitcoin surge post SVB collapse tell us ?
Following the failure of two significant banks in the past week, the price of cryptocurrencies has skyrocketed. Since last Friday, bitcoin values have increased by more than 27%, reaching a high of over $26,000 per coin. Ether‘s cost has increased by almost 22% within the same time period.
Crypto supporters claim the widely reported failure of two conventional banks emphasizes the significance of bitcoin and other cryptocurrencies’ decentralized structure, which is built on a blockchain and is thus not governed by a single entity.
A chart from real-time app data provider Apptopia shows that since Silicon Valley Bank’s stock dropped 60% last week, downloads of the top 10 cryptocurrency apps for exchanges and wallets have increased by about 15%. Coinbase, Crypto.com, Trust, Binance, Bitcoin and Crypto DeFi Wallet, Blockchain.com, KuKoin, Kraken, eToro, and BitPay were listed as the top 10 cryptocurrency applications.
During the same period, app downloads for the top 10 traditional banks and top 10 “digital first” institutions both decreased by roughly 5% and 3%, respectively. Among others, Capital One, Chase, Bank of America, Wells Fargo, Discover, Citi, and U.S. Bank are among the top 10 banking applications.
As some experts claim, Bitcoin’s recent price recovery has strengthened its status as a form of “digital gold,” acting as an asset of refuge in times of geopolitical and financial turmoil.
Given the entirety of what happened lately, it is remarkable that cryptocurrencies have performed so well. One reason is that two of the major fiat on-and-off tracks that cryptocurrency firms were using to exchange dollars for cryptocurrencies and vice versa have been shut down with the demise of Silvergate and the impending closure of Signature, raising questions about liquidity.
Furthermore, according to media reports, any prospective purchaser of Signature must consent to give up the bank’s cryptocurrency company.
Does this in any way imply that banking regulators want to push cryptocurrency outside of the established financial system? There is no concrete answer to this question as of yet but the resurgence of bitcoin has proven one thing undoubtedly— crypto is the only champion in the current situation.
It is reasonable to say that the present turmoil in the US banking industry, which may result in the Federal Reserve taking a more accommodative stance, strengthens Bitcoin’s dual function as a hedge against conventional finance and a reliable risk asset.
Given the current financial turmoil, is history possibly repeating itself?
The past week served as both a reminder and an explanation of the driving force behind the creation of Bitcoin.
Bitcoin was created in the aftermath of the Great Recession. People did not trust the traditional financial system or the government, which resulted in the development of decentralised blockchain technology and the cryptocurrencies that trade on these networks.
The financial collapse of Silicon Valley Bank has led investors to doubt the security of their bank assets. Many people have been prompted by this to search for banking options.
Traditional banks can be replaced with Decentralized Exchanges (DEXs), which give users complete control over their assets without depending on FDIC insurance.
On March 16, Cathie Wood, CEO of asset management firm ARK Invest, chastised the Fed in a Twitter thread for failing to stop bank runs regardless of all the warning signals.
Wood also emphasized that despite the ecosystem being heavily scrutinized since FTX’s demise, which has resulted in a regulatory crackdown, the current crisis was not brought on by cryptocurrencies. According to Wood, regulators are using cryptocurrency as a “scapegoat” for the internal monitoring failures of conventional finance.
Wood envisioned cryptocurrency as a remedy for the primary sites of failure, opacity, and regulatory errors in the established financial system.
Expectations of an end to the monetary tightening that decimated cryptocurrencies in 2022 are being strengthened by the failure of three regional US bankers and tremors at Credit Suisse Group AG. The unrest is also giving fresh momentum to the assertions made by Bitcoin’s most ardent advocates that the token can replace fiat money.
The general economic climate is in a very precarious position. The U.S. economy could end up in terrible shape if the SVB contagion is not stopped. We might even witness additional industry consolidation as a result of one or two or more crises.
However, one thing is certain — the market craziness appears to have sparked an optimistic mood in the cryptocurrency economy.
