In my previous post I brief talked about Silvergate crisis, and now I decided to write a detailed post about this subject.
Some investors were frustrated by the recent market slump, mainly linked to the announcements made by Silvergate. The delay in disclosing the bank's financial results raised a series of doubts among shareholders and had a terrible repercussion in the market.
But despite all that, we still don't have enough elements to discredit a positive scenario in the medium term. In this article, we're going to explain everything about the most recent crisis, and give you some perspectives on what its ramifications and effects on the market might be.
Market concern over Silvergate's financial health began in late February, when it announced that one of its client companies, Mogo Finance, had defaulted on a $20 million loan. This raised concerns about Silvergate's financial health and its exposure to the cryptocurrency market.
On March 1st, the bank communicated to the SEC (American securities regulatory agency) that it would not be able to deliver its financial results report form in time for the year 2022. With the announcement, Silvergate shares on the stock exchange and the prices of the main cryptocurrencies melted.
After the announcement, the crypto market suffered a decapitalization of around 15%, or something around 51 billion dollars in a single day.
Silvergate is an American bank that specializes in offering banking services to financial technology companies, including cryptocurrencies and blockchain. Founded in 1988, it played an important role in the development of the digital currency market and is considered a reference in offering services to cryptocurrency companies.
The bank is known for its real-time payment platform, SEN (Silvergate Exchange Network), which allows the instant transfer of funds between bank customer accounts. As an significant facilitator in the activities of these companies, he plays a key role in the development of their activities.
Silvergate has warned its investors that it may not survive 2023. The company faces intense regulatory risks and uncertainties surrounding its cash flows and ability to raise additional funding. He had already advanced a loss of 949 million dollars in the last three months of 2022, but now the numbers are believed to be even worse than predicted.
According to the bank, the delay in delivering the financial report is due to the need to add recent events, such as the sale of additional bonds to pay off outstanding loans from the Federal Home Loan Bank of San Francisco, as well as the sale of additional debt securities in January and February 2023.
These additional losses will have a negative impact on the regulatory capital ratios of Silvergate and its wholly owned subsidiary, Silvergate Bank, and may result in the inability to meet its financial obligations. An announcement like this makes it clear that the Silvergate situation is extremely serious.
A Silvergate bank collapse could have effects on the cryptocurrency market. He is a major provider of banking services to cryptocurrency companies in the United States, and his bankruptcy could affect market liquidity.
Furthermore, Silvergate is one of the leading financial institutions offering custody services for cryptocurrencies, i.e. it stores digital assets on behalf of its clients. If the bank collapses, investors may find it difficult to access their assets or face delays in their transactions.
Silvergate's failure could also prompt other banks to reconsider offering services to cryptocurrency companies, which could further affect investor confidence. However, it is important to note that it remains to be seen whether the bank is truly at risk of collapse and that many cryptocurrency companies already have multiple providers of banking and custody services.
The cryptocurrency market has also been influenced by external factors such as inflation concerns and US government announcements on interest rates.
With the COVID-19 pandemic, the US government adopted an expansionary monetary policy, injecting large amounts of money into the economy to stimulate growth. As an effect, a steady increase in inflation has been observed.
This is a stimulus for the purchase of crypto assets, but in the long run it can cause a serious problem in the countries' economy, leading to a recession that would possibly affect the crypto market. Furthermore, rising interest rates can cause a reduction in demand for risky assets such as cryptocurrencies, which can lead to a drop in prices.
However, some analysts believe that cryptocurrencies can be seen as an alternative to traditional assets, with investors looking for alternative assets, less susceptible to inflation, to protect their wealth.
You already know that the crypto market is quite volatile, especially in times of crisis like this one. Fluctuations are common and even necessary. After a period of bullishness and recovery, it is natural that some investors take their profits and also that there are natural corrections.
The crypto market has the vocation to be an incomparable store of value, protecting investors from fluctuations in inflation and preserving their purchasing power. Therefore, there is no reason to panic.
Considering the seriousness of the confirmed information about Silvergate's situation, and the market's behavior after the initial impact, it is no exaggeration to say that the worst is probably over and that the current pricing already contemplates possible consequences of the crisis involving the bank.
