The beginning of Friday’s session on the crypto market resulted in dynamic declines. Bitcoin lost more than 6% in just one hour. The reason may be the troubles of the bank, which is strongly linked to the virtual asset sector.
Silvergate falls off a cliff
The bank, which has boasted for years that it was the first to believe in the cryptocurrency sector and strongly trusted it, is experiencing serious problems. Silvergate delayed the release of its annual report. Its unveiling finally took place this week. The contents read something that is right to cause concern:
“The bank is unsure of its ability to comply with increased regulatory scrutiny of banking institutions that provide products and services to the digital asset industry.”
This information has caused a real cataclysm on AI shares. On Thursday, March 2, the session opened with a gap down as much as 43%. Despite an attempt to unwind, the decline deepened and ended up closing the session as much as 57.7% below the previous day’s price. Initially, the crypto market did not feel the move. The situation changed only after midnight UTC time. Bitcoin thus scored a flash crash, recording a dive, slightly exceeding the 6% level. After a few hours after the event, the rebound did not occur.
What are Silvergate’s ties to the cryptocurrency world?
Silvergate is a traditional banking entity that has become rather quickly associated with the cryptocurrency sector. Its clients until recently included institutions such as Coinbase, Paxos, Circle Internet Financial and Galaxy Digital. Among them was the notoriously shrouded FTX. Unfortunately, with the deterioration of the crypto sector, the Bank, too, through overexposure to it, began to lose control of the capital it managed.
To top it all off, regulators stepped in. It’s hard to say that their actions were ill-intentioned in this case, but seeing that the banks are turning to crypto en masse, they decided to force them to reduce their exposure to the sector. The main supporters of this strategy are the Federal Reserve and the Federal Deposit Insurance Corp. The whole thing is completed by the fact that Silvergate’s so-called leverage ratio, which measures its equity as a share of total assets, has fallen to 5%, from a previously healthy 11%. In theory, this 5% is sufficient, but it also represents a limit.
FDIC insurance a lifesaver?
After the report was published and the bank’s stock fell, the specter of Silvergate’s bankruptcy became real. Fortunately, the federal government provides FDIC insurance, which guarantees the withdrawal of funds held at the bank, up to the equivalent of $250,000.
However, this insurance does not cover cryptocurrencies. And given that crypto entities are often valued in the billions of dollars, the collapse of Silvergate has the right to leave a very strong mark on the crypto market.