What happened
Many cryptocurrencies continued to slide today as investors digest the fallout from the crypto bank Silvergate Capital (AND -11.82%) and rate its ability to stay in business.
The price of the world’s largest cryptocurrency, Bitcoin (BTC -4.49%), is trading down 4.3% as of 10:00 ET today from late yesterday afternoon. The price of the second largest cryptocurrency in the world, ether (ETH -3.58%)is about 4.1% lower while the price of the meme token Shiba Inu (SHIB -4.85%) fell by 5.8%.
so what
After the market closed on Wednesday, Silvergate filed a filing with the Securities and Exchange Commission (SEC) saying it had to delay filing its annual report because it had analyzed the impact of several events on its business.
Image source: Getty Images.
Silvergate operates a real-time US dollar payment network that crypto exchanges and institutional traders use to better facilitate crypto transactions. The network is very helpful to the crypto ecosystem as cryptocurrencies are traded 24/7 and the US banking system operates with a lag.
But the scandal-ridden bankruptcy of FTX, which was a major Silvergate customer, sparked a bank run, and Silvergate saw nearly 70% of its digital asset-related deposits exit the bank in the fourth quarter of 2022. The bank had done so by selling a large chunk of its bond portfolio while it was trading at a loss to cover deposit outflows, wiping out a large chunk of shareholders’ equity. Additionally, many investors believed that Silvergate could face severe regulatory action due to its relationship with FTX, and media outlets have reported that the US Department of Justice is investigating the bank.
In its filing with the SEC, Silvergate said it continued to sell bonds at a loss in January and February and that as a result its capital levels may now be below regulatory requirements. In addition, Silvergate is also currently assessing the impact of government investigations and investigations against the bank. All of this has prompted the bank to assess its “ability to continue as a going concern”.
Yesterday, some of Silvergate’s key customers, such as coin base (COIN -2.41%), announced they would no longer be using the bank, and Silvergate’s shares fell a whopping 58% and are down nearly another 11% today, trading around $5 a share. Despite falling yesterday, most cryptocurrencies have held up decently given the news. Today, however, investors seem more concerned.
“The bearish turnaround could certainly be a belated response to Silvergate’s ongoing problems,” said Clara Medalie, director of research at Kaiko, according to CNBC. “Many major exchanges and market makers are partnering with Silvergate to enable fast transactions between firms, and any disruption in activity could impact global crypto liquidity.”
“In addition, there are now broader industry concerns that U.S. regulators are attempting to sever further banking ties between crypto firms and FDIC-insured banks,” Markus Thielen, head of research at digital asset platform Matrixport, told Cointelegraph.
What now
Federal bank regulators have issued several statements warning banks about the risks associated with certain crypto activities, and another major crypto bank, signature bank (SBNY 0.90%)has also scaled back its crypto activities.
The news is of industry-wide interest as the services provided by Silvergate help exchanges, traders and others easily convert dollars into crypto and vice versa.
I still think that the biggest cryptocurrencies like bitcoin and ethereum will be around for a long time and that people will still be able to exchange them for fiat currencies. However, I currently have no interest in meme tokens like Shiba Inu.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
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