Rapture #273: Bigly Banking Issues

The market significantly broke down over the past few days, with BTC currently standing at approximately $20,500 (around 20% down from local highs) and ETH priced at around $1,470. BTC for a brief moment fell below $20,000 while ETH dropped to below $1,400. Long liquidations hit almost $250 million on March 8th, the largest amount since the FTX implosion. Correspondingly, exchange volumes hit three month highs on the fall.

On a personal level, these moves wiped out nearly all of the gains I made this year, though I am still up around 3 - 8%. Previously, I had been up 20%+. Ouch.

So, what caused prices to drop so precipitously? The main bank for US based crypto companies, Silvergate, failed. Furthermore, after Silvergate failed, a top 20 bank nationally, Silicon Valley Bank, also ran into similar issues. Consequently, Circle's USDC unpegged since the company holds some of the cash utilized to back USDC in Silicon Valley Bank.

Let's go over each issue.

Silvergate failed

Silvergate was the most renowned bank in terms of widely serving crypto institutions. Coinbase, Circle, Galaxy, CBOE Digital, and Gemini were all previously clients of Silvergate. Yet earlier this week, the bank announced that they would be winding down.

The downfall was caused by two core problems. First, Silvergate worked closely with FTX and thus the implosion of FTX caused many to lose faith in the bank. I have heard that Silvergate offered 1 day withdrawals, meaning clients could easily remove their deposits from the bank. Clients being able to easily remove deposits and a loss of trust because of having relations with an extremely public blow up did not bode well for the institution.

Issues were made worse for the bank because Silvergate had used their funds to buy long-duration treasuries last year when rates were basically zero. The rising rate environment has caused these long-duration treasuries to drop precipitously in value, meaning that when Silvergate attempted to liquidate these treasuries to shore up customer withdrawals, they did so at a significant loss.

Silvergate failure caused worries about Silicon Valley Bank

While I knew that there were likely problems at Silvergate, especially since famed short seller Marc Cahodes publicly shorting the bank, I did not predict that Silicon Valley Bank would be next. Silicon Valley Bank is significantly larger than Silvergate, with about $175.4 billion in total deposits as of December 31, 2022.

Rumors spread last week in the tech world that VCs were telling their portfolio companies, many of which held the majority of their assets in SVB, to withdraw. These actions effectively caused a bank run on SVB.

Similar to Silvergate, SVB was heavily allocated to long-duration treasuries that were issued when rates were much closer to zero, meaning that they could not be liquidated for par. Furthermore, this issue was not well-known since banks can report the value of these treasuries as what they will be worth at maturity rather than marking them to market.

I am concerned after seeing SVB that more banks have this long-duration treasuries issued during the near zero interest rate era problem, which means they are effectively insolvent. I am sure the Federal Reserve is rightfully concerned as well, especially since they published a press relace stating they are creating deposit insurance to protect insured depositors of SVB. The bank has now entered into FDIC receivership.

This newsletter is long enough already, so I will discuss how these events affected USDC in the next issue.

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