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Niche banks continue to fall apart. The Silvergate bankruptcy is being followed by Silicon Valley Bank (SVB), which collapsed on March 10.
After a failed attempt to raise capital, SBV has been taken by the Federal Deposit Insurance Corporation (FDIC). The bank will be sold or liquidated.
In strong trading on March 10, Signature Bank is on the rocks. It is down 21.11% at press time to $69.65, but traded close to $61 earlier in the day from a previous close of $90.76. Like SVB earlier in the week, Signature denies having capital problems.
Although these banks are small, the impact they are having on global markets is remarkable.
According to a recent disclosure, Circle had money with SVB, which only makes the ongoing stablecoin reserve saga more complex. Because SVB is now under FDIC control, the process of liquidating the bank or selling it should be quick, but until it is done, Circle’s reserves with SVB are frozen.
None of this is good for crypto, which is an emerging fintech and a volatile asset.
Cryptocurrencies have been under heavy selling pressure, with bitcoin dipping below $20,000 for the first time since January. There is no question that crypto markets are directly linked to capital flows in the legacy financial system, and indeed, crypto can be a leading indicator of the direction of risky assets in the broader world of finance.
An ocean of liquidity, for some
Any market thrives or dies with access to liquidity, and cryptocurrencies are no different. On March 10, John Wu, president of Ava Labs, said that he thought the SVB fiasco was a bank run. It turned out to be correct. SVB was not a risky bank, but as soon as sharks smell blood in the water, bad things can happen.
Many people in the legacy financial markets remember or have heard about the Lehman Brothers disaster in 2008. What many do not remember is that the seeds of the crisis were planted a year earlier, when BNP Paribas trade suspended in some of its funds.
The reason behind the suspension of trading was that the BNP funds held subprime US mortgage bonds.
According to the bank, as these funds were largely illiquid, there was no market making mechanism to value them and therefore they could not be valued. In the absence of a buyer, the value of the subprime bonds was effectively zero.
Today, as small banks and risky assets sell off, many questions remain in the market. Both Silvergate and SVB had great exposure to both technology and startups. Assets in the tech startup and venture capital space, much like the 2008 subprime mortgage bond market, are largely illiquid.
Small company stocks are not traded using a market making mechanism and there is no centralized pricing exchange. In the crypto space, problems with valuation are growing. In most cases, a token is not capital. As one analyst pointed out, the tokens are like tickets to a carnival, not the property of the carnival itself.
As liquidity evaporates and a flight to quality trade emerges, this inequity may become an Achilles heel for the blockchain development space.
The culture of non-ownership
The idea behind bitcoin was decentralization, and as a result, many blockchains that exist today do not have owners. You can use the platform, but one way or another, you can’t own it. When times get tough and liquidity dries up, this makes fundraising more difficult.
Some platforms have token reserves for this purpose, but many do not. When a company gets into trouble and needs money, it can sell shares. While many people think of tokens as shares, in most cases, it is not.
Of course, there are companies in the blockchain space that have a corporate structure, but like most startups, they are small companies that put up private shares in fundraising rounds with venture capitalists, and these shares are generally illiquid investments. .
When times are good, these private stocks are easy to sell, but in a choppy market, like high-risk bonds, they may be worthless.
A company that cannot borrow or sell shares has to rely on income to finance its operations. For many early-stage tech companies, this is simply not an option. In the worst case, the emerging technology sector could implode and the generated intellectual property will be put on the market at liquidation prices.
How is the abyss?
There is no organic liquidity in the blockchain space from a fiat perspective.
Fiat money flows into cryptocurrencies and the blockchain in two main channels. Either it comes from retail investors or from institutional investors. While more people are willing to accept crypto as a means of payment all the time, as prices decline in fiat terms, such trading becomes less fiat attractive.
Institutional investors who have embraced bitcoin, such as Microstrategy’s Michael Saylor, have faced dire consequences. Then there is the reputational risk that cryptocurrencies pose to institutional investors. If an industry leader like Charlie Munger or Jamie Dimon finds out that a CEO is interested in bitcoin, there could be difficulties as a result.
The last time Bitcoin and cryptocurrencies faced a prolonged bear market, it was a different industry. PayPal was blocking anyone close to cryptocurrency, and the idea of major banks offering cryptocurrency custody services was absurd.
Now a lot of money is looking for good deals. Smart money bought Apple Computer shares at $2 a share after the dot-com crash. The same smart money will be looking for distressed assets in 2023, and given market conditions, that money will be spoiled for choice.
