The future of crypto is indecisive once again
On March 10th, 2023, Silicon Valley Bank $SVB Financial Group(SIVB)$ , one of the biggest banks famous for investing in companies by venture capital, collapsed. It was the second biggest bank to collapse in the US, and it happened in a matter of days.
The Fall
Silicon Valley Bank was one of the biggest banks. So how did it collapse? Well, many factors are to blame.
Fed raised interest rates
To fight inflation, the Fed has been raising interest rates. However, this led to investors being more attentive to their money. This meant that they wanted to risk less, which led to them pulling money out of tech startups that used SVB.
2. SVB needed to get money
More startups started to close down due to less investment, leading to SVB having less capital, leading to money holders in SVB pulling their money out. SVB needed to get more money.
3. SVB sells bond portfolio
In an effort to get money, SVB sold their bond portfolio, which consisted of mainly US Treasuries, at a yield of 1.79%, below the US Treasury yield of 3.9%. This made them sell at a loss of $1.8 billion
4. SVB sells stock
To get more money, they sold $2.25 billion in equity and stock, with it’s stock being down 60% at the end of the day. Investors were worried that SVB would try to raise more capital
5. Stock drops further
Stock chart shows the dramatic fall of the stock
By now, many people advised people who has their money in Silicon Valley bank to remove it. Venture Capital firms advised people to pull their money out and SVB’s stock collapsed further and efforts to gain money were fading.
6. SVB goes to the government
SVB tried to sell it and raise money, but the government took control of it. The FDIC (Federal Deposit Insurance Corporation) announced that they will soon give money to people who had their money in SVB.
Why did only SVB fail?
There are many banks that invest in companies. There are also many banks that got affected by interest rates and other market disruptions. But why did SVB fail? SVB invests heavily in startup companies, and these startup companies couldn’t handle higher interest rates. Moreover, many of these companies were crypto companies, where regulation is somewhat lacking. When interest rates increase, investors get scared and play more safe. They avoid crypto companies and go for more safe investments. This caused them to pull their money out in startups, mainly crypto, so they don’t have to lose so much money.
SVB had heavily invested in crypto and tech companies, and when these industries fell, SVB also fell.
The Future of Crypto
Crypto has always been a unclear topic to regulators. It’s new and it’s completely virtual, which makes it hard to regulate it. Now however, trust in crypto declined heavily, as Bitcoin dropped below $20,000, Ethereum dropped below $14,000, and other crypto currencies dropped. However, these levels rose after crypto supporters say that crypto was invented if banks fail. Still, crypto is still in a dangerous position and the future of it is in confusion.
Coinbase $Coinbase Global, Inc.(COIN)$ stock dropped 17.28% in the last 5 days after they said that they has $3.3 billion in SVB.
Coinbase stock fell after Coinbase said they have $3.3 billion in SVB
How the government handles this case will be crucial as many more banks could become susceptible to failing. The bank’s collapse has the potential to massively create disruptions in the economy as people’s trust in crypto and banks are fading. Only time can tell if crypto will succeed.
Comments