The biggest banking collapse since 2008 explained. And how it will impact the crypto markets.
Thread 👇
Thread 👇
#SiliconValleyBank ('SVB') was the 16th biggest bank in the US.
Primarily servicing US technology startups.
Primarily servicing US technology startups.
During COVID, SVB massively benefited from the tech startup golden period.
In lockdown, tech companies did very well providing entertainment & delivery services.
These companies' excess cash was stored with SVB in the form of deposits.
In lockdown, tech companies did very well providing entertainment & delivery services.
These companies' excess cash was stored with SVB in the form of deposits.
SVB took a 'safe approach' with regard to these deposits:
-> They invested the lion's share of this cash in US government bonds.
Bonds backed by the US government! What could go wrong...
Apparently, a lot.
-> They invested the lion's share of this cash in US government bonds.
Bonds backed by the US government! What could go wrong...
Apparently, a lot.
When lockdowns lifted across the world, the #Fed raised interest rates to combat inflation.
This is highly relevant for bonds because bonds have an inverse relationship with interest rates:
When interest rates rise, bond prices fall.
This is highly relevant for bonds because bonds have an inverse relationship with interest rates:
When interest rates rise, bond prices fall.
A perfect storm:
- SVB customers had to withdraw their funds to stay afloat
- SVB had no choice but to sell #bonds at big losses
So large were the losses that on 8th March, they announced a $1.75 billion capital raise to compensate for the loss-making bond portfolio.
- SVB customers had to withdraw their funds to stay afloat
- SVB had no choice but to sell #bonds at big losses
So large were the losses that on 8th March, they announced a $1.75 billion capital raise to compensate for the loss-making bond portfolio.
Compensate? $1.75 billion? Loss-making bond portfolio?
These words are NOT music to depositors' ears.
-> Within 48 hours, we experienced the largest bank run since 2008.
$42 billion in withdrawals.
These words are NOT music to depositors' ears.
-> Within 48 hours, we experienced the largest bank run since 2008.
$42 billion in withdrawals.
The next day US regulators seized the bank's assets.
- So just 2 days after the capital raise announcement, a $200 billion bank was wiped out.
In an attempt to control the fallout, US regulators announced they would guarantee all deposits on Sunday.
- So just 2 days after the capital raise announcement, a $200 billion bank was wiped out.
In an attempt to control the fallout, US regulators announced they would guarantee all deposits on Sunday.
The Federal Reserve also unveiled a lending program:
The Bank Term Funding Program (BTFP) allowing banks to borrow directly from the Fed (thereby avoiding the route of loss-making bond sales).
Joe #Biden has also been very vocal to assure the public the situation is contained.
The Bank Term Funding Program (BTFP) allowing banks to borrow directly from the Fed (thereby avoiding the route of loss-making bond sales).
Joe #Biden has also been very vocal to assure the public the situation is contained.
So, what does it all mean for #crypto?
1) Deep Distrust in TradFi Banking Sector (With Potential For Capital Flow To Crypto)
The SVB collapse caused colossal shockwaves in TradFi:
- The US Big Four Banks saw their shares dip sharply.
- First Republic Bank saw its stock plunge 60%.
The SVB collapse caused colossal shockwaves in TradFi:
- The US Big Four Banks saw their shares dip sharply.
- First Republic Bank saw its stock plunge 60%.
- The trading of shares of numerous bank stocks were halted.
https://twitter.com/nlw/status/1635278371700744194
- Credit Suisse's credit default swaps hit new all-time highs.
In other words, purchasing insurance on #CreditSuisse for the event of default has never been so expensive (because the risk of default has never been so high)!
In other words, purchasing insurance on #CreditSuisse for the event of default has never been so expensive (because the risk of default has never been so high)!
https://twitter.com/WallStreetSilv/status/1635314294710759424
Many analysts, therefore, believe that the recent #Bitcoin and crypto market pump can actually be attributed to capital flows from TradFi.
Others point to factors such as #Binances' announcement to move its $1 billion protection fund to native crypto assets.
Others point to factors such as #Binances' announcement to move its $1 billion protection fund to native crypto assets.
2) 'Crypto in America Has Been Unbanked'
We have experienced the collapse of the 3 biggest crypto banks in the US: SVB, #Signature and #Silvergate.
Their ceasing to operate leaves many crypto enthusiasts in America 'unbanked'.
We have experienced the collapse of the 3 biggest crypto banks in the US: SVB, #Signature and #Silvergate.
Their ceasing to operate leaves many crypto enthusiasts in America 'unbanked'.
https://twitter.com/Melt_Dem/status/1635049201364250624
3) The Significance of The Road The Fed Will Take
The Fed can:
A. Hit pause on interest rate hikes, keep investors calm in short term, further escalate long-term inflation
The Fed can:
A. Hit pause on interest rate hikes, keep investors calm in short term, further escalate long-term inflation
B. Continue interest rate hikes, contagion risk continues in short term, inflation remains on the path to healthier levels
- The Fed has announced that it will make available additional funding to help banks stay afloat
- For the next #FOMC meeting, analysts are pricing in smaller interest hikes or even, no interest rate hike at all
- For the next #FOMC meeting, analysts are pricing in smaller interest hikes or even, no interest rate hike at all
Any easing of interest rate hikes will create more liquidity in the market and crypto, as a risk asset, tends to rally in high liquidity environments.
Good news for the short-term projection of crypto.
However, if crippling levels of #inflation are to continue, no one wins.
Good news for the short-term projection of crypto.
However, if crippling levels of #inflation are to continue, no one wins.
TLDR
- Collapse of SVB largely to do with over-exposure to US government bonds
- The 3 biggest US crypto banks are out of the game
- Significant fear of contagion risk in Tradfi
- How the Fed navigates this banking crisis may lead to short-term rallies in the crypto markets
- Collapse of SVB largely to do with over-exposure to US government bonds
- The 3 biggest US crypto banks are out of the game
- Significant fear of contagion risk in Tradfi
- How the Fed navigates this banking crisis may lead to short-term rallies in the crypto markets
And that's just a summarised version.
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