What happened
Cryptocurrencies have had a rough few days as word spread of the influential Silicon Valley bank it trades as becoming well known SVB Finance group (SIVB -60.41%), faces a liquidity crisis. While this isn’t a direct hit to crypto, many venture capital firms are using Silicon Valley Bank, leaving it at risk of a broader financial impact, which is why cryptocurrencies fell on Friday.
As of 10:30 a.m. ET, Bitcoin (BTC -7.07%) had fallen 8.5% in the previous 24 hours, ether (ETH -7.70%) was down 8.8%, and Solana (SOL -2.79%) fell by 5.7%. Looking further back, these cryptocurrencies are down 11.2%, 10.7%, and 18.5%, respectively, over the past seven days.
so what
The two major events of the past week were the collapse of Silvergate Capital and the possible collapse of Silicon Valley Bank. Silvergate has provided direct access to cryptocurrencies for many wealthy investors and institutions, and even operates many publicly traded funds. But it was seen as a more crypto-specific bank.
This week’s bank run on Silicon Valley Bank is of more concern to the broader tech ecosystem. Used by many startups, it provides services that small businesses need to quickly scale their business.
Contagion or risk cascading from one entity to another is the greatest fear here. This could lead to fewer loans being granted and investors withdrawing their investments. Silicon Valley’s venture capital firms fuel the tech ecosystem, and anything affecting them could impact many smaller startups.
As for crypto, dozens of blockchain startups have been funded by venture capitalists in Silicon Valley. When faced with pressure from regulators, banks, and ultimately investors, they may not be able to develop the tools and services that aim to make cryptocurrencies like Bitcoin, Ethereum, and Solana more useful, and therefore more valuable.
In short, these ecosystems are intertwined, and the fear this week is that a Silicon Valley bank collapse will make this crypto winter even worse.
What now
The risk for financial institutions cannot be underestimated as they are vital to the functioning of the financial system. As we saw in 2008 and 2009, when credit suddenly falls or there is a credit crunch, it can affect the entire economy.
The Labor Department’s February jobs report on Friday morning provided some positive news. The US economy added 311,000 nonfarm payrolls last month, but more people entered the labor market to look for work, taking the unemployment rate to 3.6%. So far, the slowdown in the tech sector, the crypto meltdown, and the collapse of some banks have not impacted the broader economy.
Long-term investors should consider this a buying opportunity for high-quality cryptocurrencies. Despite the drop in token values, the crypto industry continues to grow and innovate, which will ultimately increase in value.
I don’t know if we’re all the way down or even the bottom, but I’m betting on blockchain innovation winning over the long term. The Ethereum and Solana blockchains are where most developers build, and that’s where I’ll look for a buyer if this crash worsens.
SVB Financial provides credit and banking services to The Motley Fool. Travis Hoium has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, SVB Financial, and Solana. The Motley Fool has a disclosure policy.
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