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Silicon Valley Bank, what went wrong and what does this mean for Bitcoin?

US Senators ask Fidelity to reconsider Bitcoin in pension funds

You may have noticed that a number of American banks are currently in financial trouble. Among that list of troubled banks is Silicon Valley Bank, a major bank for startups in the United States that was the 15th largest bank in the country by the end of 2022.

At the time of writing, it is the second largest US bank ever to go under. That makes it important and interesting for us as investors to take a closer look at that collapse and discuss its consequences.

The Rise and Fall of Silicon Valley Bank

Silicon Valley Bank is (or was) a bank that specialized in technology companies that raised capital from so-called venture capitalists. In that regard, the bank has been at the forefront of the investments made in recent years against the backdrop of historically low interest rates and massive amounts of money printing taking place around the world.

In that respect, Silicon Valley Bank (SVB) is a wonderful example for the rest of the American economy. The extreme support from central banks and governments during the COVID-19 period resulted in a massive inflow of cheap capital into the financial markets, driving virtually all assets to an all-time high.

Somehow it’s also strange when you consider that during a global pandemic, when most of the economy was closed, the shares of many companies all reached price highs.

As a result of that cheap capital, SVB has seen a huge influx of deposits over the past three years. From 2019, the deposits increased from $ 55 billion to $ 186 billion in 2022. A growth of 340 percent in just under three years.

That suddenly changed in early 2022, when the US Federal Reserve (central bank) began aggressively raising interest rates to fight inflation. As a result, the money supply in the economy fell and, for example, the Nasdaq fell by 30 percent and let’s not explicitly mention the price drop of Bitcoin.

Most of SVB’s customers were tech companies that did not yet generate enough turnover to keep their heads above water. They were completely dependent on the inflow of new capital, on new loans, in order to perhaps fulfill their promise in the future.

As a result of the strict policy of the Federal Reserve, the inflow of capital decreased and SVB started to feel this in the number of deposits. In fact, money suddenly started pouring out of the bank at a rapid pace.

While the bank’s capital peaked at $192 billion in the second quarter of 2022, it already fell back to $175 billion in the fourth quarter of 2022. At the end of February it was ‘only’ 165 billion dollars.

More and more companies had to withdraw their deposits from Silicon Valley Bank, but the problem is that banks don’t all keep the deposits that their customers deposit in safe deposit boxes. Banks generally invest these assets in financial instruments such as government bonds.

In the case of SVB, in the fourth quarter of 2022, 56.6 percent of the assets were in government bonds and 34.3 percent in loans.

The problem with that is that they didn’t have all the cash available to meet customer withdrawal requests. In order to do so, it had to sell part of its investments (government bonds).

In a desperate attempt to save itself, the bank decided to sell a $21 billion portfolio of US government bonds, which had fallen sharply in value due to higher interest rates.

You have to imagine that the interest rate of SVB on government bonds was an average of 1.7 percent, while the interest rate is now around 5 percent due to the increases by the Federal Reserve. This makes SVB’s government bonds a lot less attractive and therefore worth less.

It is estimated that SVB lost $1.8 billion on that sale alone. To close that gap, SVB urgently wanted to raise $ 2.25 billion in capital, but that is exactly where the problems for the bank began.

The confidence is gone

As soon as the market was told that SVB had to raise capital to keep its head above water, confidence was naturally gone and a bank run ensued. Almost immediately after announcing that it had lost $1.8 billion on government bonds and planned to raise additional capital from the market, the bank’s stock plummeted 60 percent.

Ultimately, that loss of confidence resulted in $42 billion in withdrawals on March 9. SVB itself ended that day with a negative cash balance of $958 million. On Friday, March 10, the bank was subsequently declared insolvent, marking the second largest bank failure in the United States ever.

What does this mean for Bitcoin?

The big question, of course, is what this misery means for Bitcoin. In any case, the first major consequence for the American economy is that SVB’s customers can forget about the tens of billions in credit balances that are still with the bank. This may further complicate the technology sector, which has already struggled in recent months.

Another consequence is that this may mean that overall confidence in the banking sector is falling. This is also clearly reflected in the shares of almost all major banks, which were hit hard as a result of the vicissitudes at SVB, among others. As you can see in the chart below, people and businesses are currently withdrawing money from US banks at a record rate.

The US Federal Reserve has been in a fierce battle with inflation for about a year now, but the rate hikes it is using to put out that fire are now causing problems in the economy.

So you see that raising interest rates, especially if they were around zero for ten years, cannot simply be without consequences. There is a significant chance that we are heading into a US and possibly global recession.

The consequences for risk assets are generally not pretty and for Bitcoin and the crypto market in general, the consequences will probably not be tender either. In that respect, a period of gigantic uncertainty and possibly with strong price falls and possibly deeper bottoms is coming.

For some, this will mean a period of gigantic losses, but there are always parties that strike precisely at these moments and become enormously rich from a recession. The people who can remain calm when the blood is running through the streets are the rich of the future.

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