Mon 03/12

Good Morning! Today we have talked about the second-largest banking failure in US history and how it affects the crypto markets.

Find your referral links at the bottom of the letter, tell your friends about us, and get our cool goodies!

Never Heard Of Silicon Valley Bank? ( most of the world didn’t either until last week): Silicon Valley Bank is a commercial bank that primarily caters to the technology industry. It is well-known for providing banking services to tech companies and venture capital firms. Unlike other traditional banks, it is more willing to lend money to startups that may have limited cash flow and are backed by venture capital. According to the bank's website, it serves almost half of all venture-backed startups in the US, and 44% of the US venture-backed technology and healthcare companies that went public in 2022 were clients of SVB.

So What Happened?: During the pandemic in 2020, the tech industry experienced growth as many tech companies went on hiring sprees, and numerous startups received funding. The Bank reported total customer deposits of $60 billion at the end of Q1 2020, which increased to about $200 billion by the end of Q1 in 2022. With this influx of money, the bank decided to invest in treasury bonds and mortgage-backed securities. However, the Federal Reserve raised interest rates to address rising inflation in the U.S., which had negative consequences for Silicon Valley Bank. The value of the bonds they invested in fell, and higher interest rates made borrowing money more expensive, causing the tech industry to readjust. In addition, venture capital funding dwindled as investors pulled back from tech investments. To mitigate its losses, the bank sold off some of its assets at a loss of $1.8 billion. Then, on a recent Wednesday, Silicon Valley Bank announced that it needed to raise $2.25 billion in the capital, causing panic among its clients. By the end of Thursday, customers had withdrawn $42 billion in deposits from the bank. Subsequently, regulators intervened and shut down the bank.

Cryptocurrencies (Especially Stablecoins) Face The Heat As Well: Crypto markets overall saw a steep decline after the news came out as there has been a strong correlation between stock and the crypto market. Many firms are experiencing the impact of Silicon Valley Bank, as the USDC stablecoin, which is the second most liquid U.S. dollar-pegged stablecoin, lost its peg and dropped below 87 cents on Saturday. This was due to Circle, the issuer of USDC, revealing that it had $3.3 billion banked with SVB, which accounts for about 8% of the reserves supporting the stablecoin. As a result, people are looking to convert their USDC into other stablecoins, but are being hit with high fees due to the excessive use of the Ethereum network. This has caused the price of DAI, another popular dollar-pegged virtual currency that is partially backed by USDC, to drop to as low as 90 cents on Saturday. Both Coinbase and Binance have halted USDC-to-dollar conversions temporarily. As a result of the depeg of USDC, 9/10 stablecoins by market cap are trading below their dollar peg, causing a ripple effect in the market.

What Happens Now?: To restore trust in the American banking system, the Biden administration took an unprecedented step by guaranteeing that customers of the failed Silicon Valley Bank will be able to access all their money from today. The Federal Deposit Insurance Corporation (FDIC) will ensure that both SVB and Signature's customers receive all their deposits, including uninsured amounts, to prevent further bank runs and enable companies that deposited large sums to continue their operations. The government also plans to provide additional funding for eligible financial institutions to prevent similar incidents in the future. This move was welcomed by investors, with Dow futures rising by 0.9% and S&P 500 and Nasdaq futures up by 1.3% after concerns over bank failures and systemic risk caused a 3% market drop on Thursday and Friday.