What happened
Many cryptocurrencies continued to slide today as investors digest the fallout from the crypto bank Silvergate Capital (SI 0.87%) and evaluate its ability to stay in business.
The price of the world’s largest cryptocurrency, Bitcoin (BTC 0.13%), is trading 4.3% lower than late yesterday afternoon as of 10 a.m. ET today. The price of the world’s second-largest cryptocurrency, Ethereum (ETH 0.31%), is roughly 4.1% lower, while the price of the meme token Shiba Inu (SHIB 0.08%) is down 5.8%.
So what
After the market closed Wednesday, Silvergate submitted a filing to the Securities and Exchange Commission (SEC), stating that it would need to delay the filing of its annual report as it analyzed the impact of several events on its business.
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Silvergate operates a real-time payments network for U.S. dollars that crypto exchanges and institutional traders use to better facilitate crypto transactions. The network is very helpful for the crypto ecosystem because cryptocurrencies trade around the clock and the U.S. banking system operates on a lag.
But the scandal-laden bankruptcy of FTX, which had been a large client of Silvergate, prompted a bank run, and Silvergate saw nearly 70% of its digital-asset-related deposits leave the bank in the fourth quarter of 2022. The bank had to sell a big chunk of its bond portfolio, while it traded at a loss, to cover the deposit outflows, wiping out a big chunk of shareholder equity. Furthermore, many investors believed Silvergate could face some severe regulatory action due to its relationship with FTX, and media outlets have reported that the U.S. Department of Justice is looking into the bank.
In its filing with the SEC, Silvergate said it continued to sell bonds at a loss in January and February and that its capital levels could now be below regulatory requirements as a result. Furthermore, Silvergate is also currently assessing the impact of regulatory inquiries and investigations into the bank. All of this has led the bank to assess its “ability to continue as a going concern.”
Yesterday, some of Silvergate’s major clients, such as Coinbase (COIN 1.27%), announced they would stop using the bank, and Silvergate’s stock fell a whopping 58% and is down nearly an additional 11% today, trading around $5 per share. Although most cryptocurrencies fell yesterday, they held up decently given the news. Today, however, investors seem more worried.
“The bearish turn could certainly be a delayed reaction to Silvergate’s ongoing issues,” said Clara Medalie, director of research at Kaiko, according to CNBC. “Many large exchanges and market makers partner with Silvergate for fast transactions between entities, and any halt in activity could have an impact on global crypto liquidity.”
“In addition, there are now wider industry concerns that U.S. regulators are trying to cut off further banking relationships between crypto firms and FDIC-insured banks,” Markus Thielen, the head of research at digital asset platform Matrixport, told Cointelegraph.
Now what
Federal banking regulators have issued multiple statements warning banks about the risks associated with certain crypto activities, and another large crypto bank, Signature Bank (SBNY 3.78%), has also scaled back its crypto activities.
The news is of industrywide interest because services provided by Silvergate help exchanges, traders, and others easily change dollars to crypto and vice versa.
I still think the largest cryptocurrencies, like Bitcoin and Ethereum, will be here for a long time and that people will continue to be able to swap them for fiat currencies. However, I have no interest in meme tokens like Shiba Inu right now.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
