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Two high-profile bank closures are wreaking havoc on the cryptocurrency market, with major tokens bitcoin and ether plunging nearly 10% for the week each as concerns grow over liquidity shortages for the industry.
โUS cryptocurrency exchanges are suffering the brunt of liquidity,โ says Conor Ryder, a research analyst at Paris-based research firm Kaiko. Bank deposits that helped fund cryptocurrency in US markets are declining and investors are โtaking a wait-and-see approachโ as cryptocurrency firms seek banking partners outside the US.
The crypto market, now valued at $964 billion per CoinGecko and $931 billion for CoinMarketCaphas been affected by the closure of crypto banks Silvergate and Silicon Valley Bank (SVB
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Macroeconomic pressures are also driving prices of cryptocurrencies and related stocks lower, as investors shun risk in the face of the Federal Reserve-engineered interest rate hike, says Joy Yang, director of product management at indices at cryptocurrency research firm MarketVector.
"As investors and traders become more confident in the Fed's moves and the market outlook, we should expect to see a new focus on fundamentals and growth valuations," he adds.
These considerations affect banks in general. The KBW Nasdaq bank index lost sixteen% for the week.
Niche lenders like Silvergate and SVB, which have targeted specific clients in the cryptocurrency and tech worlds, are more likely to be affected by industry shakeups, says Hany Rashwan, co-founder and chief executive of the lending firm. investment in cryptocurrency 21Shares. โWhen the underlying industry suffers, obviously there will be exaggerated pullbacks.โ
Silvergate Bank announced that it would be liquidation of operations and liquidation of its assets on Wednesday, a week after it delayed its annual financial report and caused a rush of clients to Withdraw funds.
SVB, the banking partner of choice for many Silicon Valley startups and VCs, including giants Andressen Horowitz and Sequoia Capital, was close by the California Department of Financial Protection and Innovation on Friday. The move came after the bank sold a $21 billion bond portfolio to increase liquidity, sending its shares plummeting. 64% in pre-market operations. The actions were halted before the regular session began and have never been reopened.
โSVB is a good indication that this was not necessarily a cryptocurrency-specific problem, but rather a case of traditional banks taking on too much risk with their long-duration bonds, which have been hit harder by rising rates. Ryder adds.
The Federal Reserve has been raising short-term interest rates that were cut to zero to deal with the Covid-19 pandemic. The easy money policy is the likely cause of the high inflation that the central bank is trying to combat, even at the risk of limiting economic growth.
That would be problematic at best, but the crypto industry is dealing with the fallout from a series of bankruptcies last year and a backlash from Washington against the lack of investor protection for digital assets. Silvergate, which specialized in the transmission of funds to and from cryptocurrency companies, was the flashpoint, dealing with deposit evaporation by selling bonds it held for less than it paid. That prompted big clients to pull their money out of the bank, and its decision to close appears to have raised concerns about SVB, which announced a stock sell-off to bolster its liquidity.
โThe biggest banks have a disincentive right now to accept deposits from crypto companies because of the level of risk involved,โ Ryder adds.
A sizable but shrinking crypto business has also tainted Signature Bank, whose shares were trading 22% lower on Friday despite its statement that 18.5% of deposits came from clients with exposure to digital assets. That brought its drop for the week to 37.5%.
As banking woes weigh on cryptocurrencies, bitcoin fell below $20,000 on Friday and was trading at $19,998 by the end of the day, according to nomic. This week marked the first time the original crypto had traded below $20,000 since January. Ether was also down 1% at $1,420.
Coins associated with billionaire investor Justin Tron were punished after a 51% drop on huobi Thursday night in New York. It moved to $2.31 from $4.73 in a matter of minutes before stabilizing and trading on Friday afternoon at $3.90, down 21.8% for the week.
Sun said huobi's decline was due to "leveraged liquidation" by "some users," before announcing on twitter that he had created a fund of 100 million dollars to stabilize huobi, without specifying the origin of the money.
Tron and just, also in Sun's sphere of influence, were 10% and 6% off, according to Nomics.
Also adding to the pressure on the digital asset market, President Joe Biden released a proposal Thursday for a 30% tax about the use of cryptomining. The effect paled in comparison to the macroeconomic news, according to Rashwan.
โA long year awaits us,โ he adds. โThere is still additional damage that could be done in the broader economic and political sphereโ that could continue to hurt risky assets like cryptocurrencies, she says.
