The Demise of Silicon Valley Bank: A Dark Day With a Crypto Lining?
How the crash of SVB came to be and how it affected the crypto market
Silicon Valley Bank (SVB) became a well-known name in the world of finance, particularly in the tech industry. The bank, headquartered in Santa Clara, California, specialized in providing financial services to startups, venture capital firms, and private equity firms.
Founded in 1983 by a group of entrepreneurs who had the vision to support the emerging technology industry in Silicon Valley, SVB expanded beyond Silicon Valley and operated in many other innovation hubs throughout the United States, as well as internationally.
How Things Went South For SVB
The fall of SVB was not caused by crypto firms, but crypto is still being used as a scapegoat for lapses in banking risk management and oversight. So what happened?
Silicon Valley Bank invested a considerable amount of its bank deposits into long-term US treasuries and mortgage-backed securities from agencies. However, as interest rates increased due to inflation, the value of these bonds decreased, and the bank’s bond portfolio began to drop.
The bank could have regained its capital if it held onto these bonds until their maturity date. Previously, the bank had lent money out for short durations, but in 2021, it shifted to long-term securities for a higher yield and did not protect its liabilities with short-term investments for quick liquidations. As a result, the bank became insolvent for several months and couldn’t liquidate its assets without incurring significant losses.
Additionally, when the tech sector became affected by economic factors, many clients of the bank withdrew their money, causing further issues for SVB as its funds were tied up in long-term investments. The bank started selling its bonds at a significant loss, causing distress to its customers and investors. Within two days of disclosing the sale of assets, SVB collapsed.
Who This Affects the Most
On March 6, when Silicon Valley Bank announced its $1.75 billion capital raising, concerns arose that the bank was short on funds. This news spread like wildfire on social media platforms like Twitter, causing a panic that led to clients withdrawing their money in large amounts. As a result, the bank’s stock price dropped by 60% the following day.
Two days later, California regulators closed down Silicon Valley Bank and placed it under the supervision of the FDIC. Unlike with personal banking, SVB dealt with much larger accounts from its clients. Due to a bank run, the pace of withdrawals escalated quickly, causing the money to diminish rapidly. This had a snowball effect and affected most clients who had deposits exceeding the $250,000 FDIC limit.
A large number of startups kept their money in their primary account with Silicon Valley Bank instead of utilizing other accounts like a money market account to pay their expenses. As a result, the majority of their working capital remained in their SVB account, deposits they needed access to for paying bills and payroll. Since stockholders and investors in SVB were not protected by FDIC on their investments, they experienced significant losses.
Etsy, Roku, Ginkgo Bio, Roblox, and Rocket Labs are among the big tech companies that had a significant amount of cash deposited in Silicon Valley Bank. While most banks are insured by the FDIC, the accounts in SVB were only insured up to $250,000, which is not much for companies that may spend millions in a month.
The Ripple Effect
48 hours after FDIC’s takeover of Silicon Valley Bank, regulators in New York closed Signature Bank on Sunday as a precautionary measure to mitigate risk in the wider financial system. The mid-size bank offered lending services to real estate companies and law firms and had deposits totaling nearly $100 billion in its 40 branches nationwide.
Much like SVB’s, the majority of Signature Bank’s clients had deposits exceeding $250,000 in their accounts. Since the Federal Deposit Insurance Corporation only insures deposits up to that amount, anything above this limit would not enjoy the same level of government protection.
Nearly 90% of Signature Bank’s approximately $88 billion in deposits were uninsured by the end of 2022. As news of Silicon Valley Bank’s difficulties began to spread, Signature’s clients became anxious, concerned that their own deposits might be in jeopardy. The bank’s stock ultimately took a dive.
The collapse of Silicon Valley Bank and Signature Bank has highlighted the difficulties faced by small and midsize banks that concentrate on niche industries and can be more susceptible to bank runs than their larger counterparts.
Bitcoin & Its Role During Financial Crises
The emergence of cryptocurrency can be traced back to the financial crisis of 2008. During this time, the traditional financial system faced a major collapse, resulting in a loss of trust in banks and other financial institutions.
As people began to question the stability of the traditional financial system, a new form of decentralized currency called Bitcoin was introduced in 2009. Bitcoin offered a new way of conducting financial transactions without the need for intermediaries like banks. Instead, the transactions were recorded on a decentralized ledger called the blockchain, which was maintained by a network of users.
Decentralized as it was and still is, Bitcoin and other crypto currencies have been a Messiah for those looking to have their cake and eat it to, or, to put it in financial terms, have their money in a virtual environment and spend it to without the fear of it disappearing virtually overnight, as was the case with the downfall of SVB.
However, the government and the vast majority of the public remained, and still do, on the fence, propagating the traditional banking system which is fundamentally flawed and, the more extreme would say, corrupt. All it takes is a semi-closer look into the economic downfall of 2008 caused by amazingly unethical and downright unfathomable financial practices that left all the regular Joes in ruins. Granted, not just the Joes, there were some Onazises here and there affected by it all, but the gist remains the same – it’s always the little guy who suffers most.
The banks? Bailed out by the government and the Fed, what else, all the while the severely damaging economical consequences trickled across the globe, affecting the purchasing power of every single individual in the world, minus the 1%. Is that really the economy any would wish to live in, dreading the day when the next bank goes belly-up, leaving everybody afloat as the government drags it back to shore, granting it the gift of financial CPR.
Yes, SVB was for startups, medium corporations and tech ventures, and the “little guy” analogy does not stand in its core sense. However, the mere fact that such a behemoth of a bank could go under due to the same old unethical and flawed practices is enough for every single individual on the planet to question the fragility, no, the putridity of the system we’re all participating in.
That’s precisely why crypto matters. Yes, it’s affected by the current socioeconomic trends and yes, its value can fluctuate, but so does the value of traditional currencies. However, no longer can Bitcoin and co. disappear overnight and without a trace. For those who are willing to invest a bit of time to learn about it and a bit of time to truly understand it, crypto currencies are not the future, but the present.
It is apparent that the current system is flawed. To an extent, it has already changed to accommodate the world’s changing needs, and the arrival of crypto has played a pivotal role in that change. That said, as with all other investments, be careful and choose your course of action wisely. Crypto is volatile asset: we have all seen crypto prices fall just as quickly as they rise. So what’s the most pragmatic approach to doing things? Diversify your portfolio. But do not leave crypto out of it.