By now you may have heard about the failure of Silicon Valley Bank. This is 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 a bank run that drained the company’s capital.
The fallout of Silicon Valley Bank will affect the tech industry as a whole, but the cryptocurrency market is already feeling the effects. As of the publication of this article, the second largest stablecoin, USDC, has lost its $1 peg and has yet to recover. It dropped to $0.89 at one point.As CoinDesk(opens in new tab) USDC notes that it has fallen significantly more than after the collapse of the cryptocurrency exchange FTX.
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what happened?
If you haven’t heard of Silicon Valley Bank, it was a commercial bank that primarily served the technology industry. Both tech companies and venture capitalists were more willing than other traditional banks to lend money to VC-backed startups that may be cash flow-starved (read: many tech startups) .
Top US Crypto Bank Silvergate Liquidated
“We bank nearly half of the U.S. venture-backed startups, and 44% of U.S. venture-backed tech and healthcare companies listed in 2022 will be SVB customers,” the bank proudly emphasizes. Did. website(opens in new tab).
Silicon Valley Bank was making risky investments, but it was the pandemic that really seemed to hurt the bank. Or, really, what it did with the success of the tech sector in the early days of the pandemic.
In 2020, the tech industry thrived amid global quarantines and lockdowns. People were spending a lot of time working remotely or in front of a computer. Tech companies hired more and more, and many startups received funding. Silicon Valley Bank closed with his $60 billion in total customer deposits in the first quarter of the year. By the end of the first quarter of 2022, Silicon Valley Bank customer deposits totaled nearly $200 billion.
With all this new funding, Silicon Valley Bank has decided do something(opens in new tab) And. As such, the company invested in government bonds and mortgage-backed securities. The Federal Reserve then raised interest rates to combat rising inflation in the United States. This has hit Silicon Valley banks in multiple areas. One is that the value of the bonds in which I invested has fallen. Borrowing costs due to rising interest rates have caused a recalibration in the tech industry. To make matters worse, as VCs withdrew from technology investments, his venture capital funding began to dwindle. To minimize losses, Silicon Valley Bank sold some of its assets, leaving him with a $1.8 billion loss.
And last Wednesday, Silicon Valley Bank announced(opens in new tab) They said they needed to raise $2.25 billion in funding. Bank customers panicked at the news. By the end of Thursday, $42 billion in deposits had been withdrawn from Silicon Valley banks. The next day, regulators stepped in and closed the bank.
When it comes to cryptocurrencies, recent crypto industry failures may have contributed to the atmosphere that led to this bank run. Shortly before Silicon Valley Bank went bankrupt, another bank that primarily served the technology sector also went bankrupt. On March 8, Silvergate Bank announced it would be closing and liquidating its assets. Silvergate was notably known as one of the most crypto-friendly banking institutions and had many customers in the crypto industry.
But cryptocurrency companies are also feeling the impact of Silicon Valley Bank. In fact, that’s why USDC is trading well below the $1 peg. Circle, the issuer of stablecoins, announced(opens in new tab) $3.3 billion in deposits with Silicon Valley Banks; According to CoinDesk, this represents about 8% of the reserves backing the USDC stablecoin.
Fees have also hit these cryptocurrency holders as people try to convert USDC to other stablecoins.Due to the excessive use of the Ethereum network to complete these transfers, the gas fees associated with the transaction are all the time(opens in new tab).
It’s unclear at this time what Silicon Valley Bank’s customers will do next. Some within the tech industry are concerned about whether the various start-ups the bank has as clients will be able to pay their salaries in the coming weeks. It is unclear how much money will be recovered for bank customers.according to report(opens in new tab), more than 85% of bank deposits were not insured. FDIC insurance covers up to $250,000 per account. Some VCs such as Gary Tan(opens in new tab) and Associate of Elon Musk David Sachs(opens in new tab) We are asking the government to step in and help beyond that.
As for Elon Musk himself, he himself is in chaos.
When one Twitter user suggested buying a failed bank and using it to turn Twitter into a digital bank, Musk answered(opens in new tab) That he is open to the idea.
