What is a Silicon Valley bank and why does its failure affect cryptocurrency?

By now, you may have heard about the Silicon Valley bank collapse, the second-largest bank failure in US history and the biggest since the 2008 financial crisis. On Friday, regulators stepped in to take over the bank after the bank’s management drained the company of capital.

While the repercussions of the Silicon Valley Bank failure will be felt in the tech industry, the cryptocurrency markets are already feeling the effects. As of the publication of this article, USDC, the second largest stablecoin, has lost its peg to the one dollar and has yet to recover. It fell to $0.89 at one point. like CoinDesk(Opens in a new tab) It indicates that USDC fell much lower than it did even after the cryptocurrency exchange crash FTX.

what’s going?

If you haven’t heard of Silicon Valley Bank before, it was a commercial bank that pretty much served the tech industry. Both tech and venture capital firms courted the company, which was more willing than other traditional banks to lend money to VC-backed startups that might have been short on cash flow (read: many tech startups).

“We liquidate nearly half of all US venture-backed startups, and 44% of US venture-backed tech and healthcare companies that went public in 2022 are SVB clients.” website(Opens in a new tab).

While the Silicon Valley bank made risky investments, what seemed to hurt the bank was the pandemic. Or, really, what I did because of the tech sector’s success during the early days of the pandemic.

In 2020, the tech industry is thriving amidst quarantines and lockdowns across the world. People have been spending a lot of time working remotely or in front of their computers. Technology companies continued rapid hiring and a large number of startups received funding. The Silicon Valley bank finished the first quarter of that year with total customer deposits of $60 billion. By the end of the first quarter of 2022, the Silicon Valley bank had a total of about $200 billion in customer deposits.

With all this new money, the Silicon Valley bank decided to do something(Opens in a new tab) with her. Therefore, the company invested in treasury bonds and mortgage-backed securities. Then, in an effort to tackle rising inflation in the US, the Federal Reserve raised interest rates. It ended up hitting Silicon Valley Bank in multiple territories. First, the value of those bonds in which you invested has decreased. The cost of borrowing money due to rising interest rates has caused the tech industry to reset. Adding to the problem, venture capital money began to dwindle as venture capital backed away from technology investments. To reduce its losses, Silicon Valley Bank sold some of its assets at a loss of $1.8 billion.

Then, this past Wednesday, the Silicon Valley Bank announce(Opens in a new tab) It needs to raise $2.25 billion in capital. Bank customers panic at the news. By the end of Thursday, $42 billion in deposits had been withdrawn from the Silicon Valley bank. The next day, regulators stepped in and closed the bank.

As for cryptocurrency, it is likely that the recent failures in the cryptocurrency industry helped smooth the atmosphere that powered this bank. Shortly before the fall of the Silicon Valley bank, another bank that largely catered to the technology sector also failed. On March 8, Silvergate Bank announced that it would close and liquidate its assets. Silvergate has been particularly known as one of the most crypto-friendly banking institutions and has many clients in the cryptocurrency industry.

But crypto companies are also feeling the effects of Silicon Valley’s bank, too. In fact, this is the reason why USDC is trading at well below $1. Circle, a stablecoin issuer, announce(Opens in a new tab) It has $3.3 billion in deposits in Silicon Valley Bank. CoinDesk says this amounts to about 8 percent of the reserves backing the USDC stablecoin.

As people look forward to converting their USDC into other stablecoins, these cryptocurrency holders are also taking a hit on fees. Due to the excessive use of the Ethereum network to complete these transfers, the gas fees associated with the transactions are The Road(Opens in a new tab).

It’s not clear what comes next for Silicon Valley Bank customers at the moment. Within the tech industry, some are worried about whether the various startups the bank has as its clients will be able to offer payroll in the coming weeks. It is not known only how much money will be refunded to the bank’s clients. according to reports(Opens in a new tab)More than 85% of bank deposits are uninsured. FDIC insurance covers up to $250,000 per account. Some VCs like My neighbor tan(Opens in a new tab) and his partner, Elon Musk David Sachs(Opens in a new tab) They urge the government to intervene and help in the aftermath.

As for Elon Musk himself, he also got himself into this mess.

When a Twitter user suggested buying the failed bank and using it to turn Twitter into a digital bank, Musk answered(Opens in a new tab) He is open to the idea.

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