The cryptocurrency market’s recent trajectory, initially hinting at a much-anticipated recovery, took an unexpected turn over the weekend with a significant and abrupt decline. Within a single day, the market cap plunged by 7%, followed by a week-long downturn of 13.5%. This sudden shift was triggered by the collapse of Silicon Valley Bank, closely following the voluntary liquidation announcement from Silvergate, another bank known for its crypto-friendly stance. The subsequent failure of Signature Bank adds to the string of banking crises, raising concerns about the broader implications for the global economy and the ripple effects on the cryptocurrency landscape.
The rapid succession of banking failures — Silicon Valley Bank, Silvergate, and now Signature — underscores the profound challenges facing the global economy. This series of collapses hints at a considerable distance from achieving a stable and comprehensive economic recovery. Compounding these concerns are ongoing interest rate hikes and the specter of more stringent regulatory measures, both of which contribute to the current instability in the cryptocurrency market. The recent suggestions from financial institutions that the Federal Reserve might intensify its rate hikes this year indicate a lack of solid economic foundations required for a sustained bullish trend in the cryptocurrency sector.
However, amidst growing apprehensions about the stability of traditional banking systems, Bitcoin witnessed a notable rally on Monday. This development raises intriguing questions about the relationship between a loss of faith in the conventional financial system and the potential buoyancy of certain cryptocurrencies. As the market grapples with these challenges, it remains to be seen how the interplay of economic uncertainties and evolving regulatory landscapes will shape the recovery and future trajectory of cryptocurrencies.
What Does It Mean When a Bank Fails?
A bank failure occurs when a federal or state regulatory authority shuts down a bank due to its inability to fulfill its commitments to depositors, borrowers, and other stakeholders. The authority to close national banks lies with the federal government, while banking commissioners wield the power to shut down state-chartered banks.
Understanding Bank Failures
A bank faces the prospect of failure when it encounters difficulty meeting its financial commitments to both creditors and depositors. This predicament may arise due to insolvency or insufficient liquid assets to meet payment obligations.
The primary reason for a bank’s failure often stems from the situation where the value of the bank’s assets drops below the market value of its liabilities, representing the obligations to creditors and depositors. This decline can result from substantial losses in the bank’s investments. Predicting the exact timing of a bank failure is a challenging task.
What Occurs in the Event of a Bank Failure?
In the event of a bank failure, the distressed bank may attempt to secure loans from other financially stable banks to fulfill its depositor obligations. If the failing bank is unable to meet its commitments, it could trigger a bank panic, leading depositors to hastily withdraw their funds in what is commonly referred to as a bank run. This exacerbates the situation for the failing bank by depleting its liquid assets, diminishing its capacity to lend money to borrowers.
Since the establishment of the FDIC, the U.S. government has provided insurance for bank deposits, offering protection up to $250,000 per depositor per bank. In the case of a bank failure, the FDIC steps in, taking control and deciding between selling the failed bank to a more financially sound institution or directly managing its operations.
In numerous instances, individuals with funds in the bank that has undergone failure won’t encounter any disruptions in their banking experience. They will retain access to their funds and should be able to utilize their debit cards and checks just as they would under normal circumstances.
Facing Another Banking Crisis
The recent closures of Silicon Valley Bank and Signature Bank unfolded differently from the situation at Silvergate Bank, as both were forcibly shut down by U.S. regulators, placed under federal receivership. Despite these distinctions, Silicon Valley Bank (SVB) experienced a series of withdrawals, compelling it to sell assets at significant losses. Efforts to raise funds through additional stock sales and attempts to put the bank up for sale proved unsuccessful, mirroring the challenges faced by Silvergate. Signature Bank encountered a similar fate, grappling with a surge in customer withdrawals fueled by apprehensions stemming from the failures of SVB and Silvergate.
The banking turmoil extends beyond these instances, with First Republic witnessing a plummet in its stock price as investors grow increasingly fearful and risk-averse. This trend is prevalent among several U.S. banks, including even the largest financial institutions globally, as their stocks face considerable declines. A key contributor to the current banking crisis is the prevalence of substantial unrealized losses, estimated at around $600 billion for many banks, particularly arising from bonds and mortgage-backed securities.
The root cause of these losses lies in the actions of the Federal Reserve, which, over the past year, has been actively increasing interest rates. When a central bank raises rates, it diminishes the attractiveness of holding bonds, especially when rates surpass the yields offered by these financial instruments. Consequently, the U.S. and Western banking system is grappling with this predicament, prompting interventions from the Federal Reserve, the U.S. Treasury, and other entities. The measures implemented include an unusual move by guaranteeing customer deposits above $250,000 (beyond the usual scope of the FDIC) and providing “additional funding to eligible depository institutions” to meet withdrawal requests.
Rates, Rules, and the Road to Recovery
On a more foundational level, the unfolding banking crisis serves as a stark indicator of the global economy’s precarious state, struggling to fully rebound from the lingering effects of the Covid-19 pandemic. High inflation persists in numerous developed nations, and central banks, including the Federal Reserve, hint at further rate hikes. Traders speculate that the Fed might elevate its base rate to 6% this year, a move that could prolong the global economic slowdown.
The cryptocurrency market, despite experiencing a modest revival since the beginning of 2023, has yet to reclaim the peaks of late 2021. While Bitcoin saw a surge to $24,972 on February 20, marking a 50% gain since January 1, its performance, along with the overall market, was significantly impacted by the setbacks of Silvergate Bank, followed by the collapses of Silicon Valley Bank and Signature Bank.
However, even at $24,972, Bitcoin remains 63% below its all-time high of $69,044, underscoring the subdued market conditions. The added pressure on crypto comes from looming regulations, as the Biden administration proposes a 30% tax on the electricity used for mining cryptocurrencies, contributing to a weekend price drop.
The recent failures of banks and crypto exchanges have intensified lawmakers’ push for specific cryptocurrency regulations. The EU advocates fast-tracking cryptocurrency capital rules for banks, while the Biden administration responds to FTX’s bankruptcy by urging comprehensive legislation from Congress.
Combined with high interest rates, inflation, and investor uncertainty, these regulatory developments create an unfavorable economic environment for cryptocurrency. In this context, investors continue to seek safer options, hindering a substantial comeback for crypto, at least for now.
Despite the prevailing negativity, Monday witnessed an intriguing market response to ongoing banking crisis news. After a 16% decline between Thursday, March 9, and Friday, March 10, Bitcoin rose to $24,469 on Monday, March 13, reflecting an 18% gain in 24 hours. Many interpret this as a sign of investors flocking to safer havens, with gold also seeing an increase amidst the banking turmoil.
While the situation remains precarious, there is optimism that the Federal Reserve’s intervention may prevent a crisis on the scale of 2008. Analysts believe that regulators will act decisively this time, limiting systemic effects and avoiding a repeat of the Great Financial Crisis.
Even if another 2008 scenario is averted, the ongoing banking challenges could bolster the standing of Bitcoin and select cryptocurrencies in the long run. Bitcoin’s uninterrupted operation since 2009, irrespective of the number of banks facing difficulties, positions it as a resilient asset likely to endure for many years to come.
What happens to cryptocurrencies in the event of a banking collapse?
In the unfortunate event of a bank failure, deposits are insured by the FDIC. However, it’s crucial for investors to be aware that if their crypto exchange were to close down, no government agency would step in to reimburse them.
Which crypto bank recently faced closure?
Regulators have shut down Signature Bank, marking the third U.S. bank failure in just a week. Signature Bank, a significant destination for crypto companies in the United States, has been ordered to close its operations by regulators in New York.
Will Bitcoin experience an upswing if banks fail?
Banking crises tend to positively impact Bitcoin. The recent news of a bank failure and the closure of another has provided a boost to Bitcoin and other cryptocurrencies, according to market experts speaking to Axios. This connection ties the weekend’s banking crisis to evolving expectations in the market.
Is there a possibility of Bitcoin dropping to zero?
While it’s a reasonable assumption to consider hypothetical scenarios where Bitcoin’s value reaches zero, the likelihood of such an event is minimal. Although theoretically possible, specific factors would need to align for Bitcoin’s price to crash to zero. It’s crucial to acknowledge that this scenario is highly improbable, but the potential factors leading to it are worth contemplating.
In the face of sudden banking failures, the intricate relationship between traditional financial institutions and the cryptocurrency market becomes increasingly evident. The recent collapses of Silicon Valley Bank, Signature Bank, and others underscore the vulnerabilities within the banking sector, prompting concerns about the broader economic landscape. While banks grapple with unforeseen challenges, the cryptocurrency market stands at a crossroads, influenced by regulatory uncertainties, interest rate hikes, and the overarching fragility of the financial system.
As investors navigate these uncertainties, the resilience of cryptocurrencies, particularly Bitcoin, becomes more apparent. The recent market reactions, including Bitcoin’s surge amidst banking crises, suggest a shifting dynamic where alternative assets gain traction during traditional financial tumult. However, the road ahead is complex, with looming regulatory measures and economic uncertainties casting shadows on the crypto landscape.
The sudden banking failures serve as a stark reminder of the need for a robust and diversified financial approach. The crypto market, while facing its own set of challenges, could potentially find itself in a position of increased relevance amid the broader financial turbulence. As the financial landscape continues to evolve, staying informed, seeking professional advice, and adapting strategies become imperative for investors navigating these turbulent times.