May 29, 2023

Panic overtook the financial markets as Silicon Valley Bank bank-run contagion got worse.

Silicon Valley Bank (SVB), one of the most proud of Silicon Valley, has been literally blown out after failing to raise new capital, making the most significant bank failure since the 2008 crisis.

The Federal Deposit Insurance Corporation (FDIC) seized the bank over the weekend amid a fast, crippling bank run.

SVB Went Bankrupt on Heels of Bank Run

The downfall is traced back to earlier this week when SVB announced that they would make a series of moves to solve the liquidity problem. The bank sold $21 billion and issued $2.2 billion equity to raise capital.

The issuance, however, fell through because the VCs quickly recognized a risky scenario beneath those unusual moves. That triggered the bank run.

SVB reportedly had a “negative cash balance,” estimated at $958. On Feb. 27, two weeks before Silicon Valley Bank (SVB) disclosed massive losses, the bank’s CEO Greg Becker sold $3.6 million worth of the bank’s shares.

As reported, the sale was made through a trust fund managed by Greg Becker. The fund creates wealth management plans for individuals and families after death.

The Death Spiral

The share price of Silicon Valley Bank plunged 60% on March 9 as investors panicked in response to the latest announcement. Video footage has flooded the Internet, showing queues of jittery depositors waiting to get their money back at different banking branches across the country.

According to Bloomberg, almost half of US venture capital-backed startups were involved with Silicon Valley Bank.

The majority of banks offer a wide variety of loans. SVB has a limited amount of cash on hand. The difference is that the bank’s sole concentration is on tech startups.

Typically, these companies obtain funds by participating in investment rounds or conducting an initial public offering (IPO). Under the bleak economic outlook, high-interest rates have dried up tech markets, inducing those companies to pull back their cash reserves.

Crypto Suffers

The tragic event has dragged down the share prices of other banks. First Republic Bank recorded a 16.5% drop in share price, Signature Bank plunged more than 12%, and Zions Bancorporation dropped 11.4%.

The unfortunate event has resulted in a decline in the share prices of other financial institutions. The share prices of First Republic Bank dropped by 16.5%, Signature Bank fell by over 12%, and Zions Bancorporation fell by 11.4%.

Meanwhile, concerns amount as people question SVB’s link to the crypto industry, particularly stablecoin issuers.

According to new updates from Circle, the stablecoin issuer confirmed $3.3 billion of $40 billion $USDC reverses were stuck on SVB. Amid the collapse, stable USDC de-pegged by $0.9455 at the press time.

On Friday, major cryptocurrency exchanges such as Binance and Coinbase announced that they would temporarily halt USDC conversions as the ripple effect of the Silicon Valley Bank contagion seemingly has no end.

Both Binance CEO Changpeng Zhao, and the issuer of stablecoins, Paxos, have denied having any relationship with Silicon Valley Bank.

BlockFi, the defunct lending platform, reportedly has $227 million in SVB. BlockFi is among customers with deposits uninsured by Federal Deposit Insurance Corporation (FDIC).

Silicon Valley Bank was also the backer of MtGox and CoinLab in a VC funding in 2013. With the fall of SVB, there are many questions about contagion. If a lack of confidence manifests in markets, there could be further bank runs.

For the crypto sphere, the situation looks dire. Any blockchain company that relies on early-stage funding is in bad shape. Very few lenders or investors will want to enter the market until there is more certainty, and that could take years to develop.

The crypto winter that began in 2022 isn’t listing anytime soon, and in fact, it may get worse before it gets better.

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