The collapse of banks has been a common occurrence throughout history, with the most recent being the global financial crisis of 2008. Banks play a crucial role in the financial system, and their collapse can have severe economic consequences with ripple effects in other sectors, including digital currencies or cryptocurrency. In this blog post, we will explore the impact of bank collapses on the crypto market.
Firstly, it is important to note that the cryptocurrency market is not immune to economic turbulence. Like traditional financial markets, the crypto market is influenced by factors such as market sentiment, global economic events, and regulatory changes. These all play a huge role in how people trade in the stock market, the same as with crypto.
One of the primary ways that bank collapses can impact the crypto market is through investor sentiment. When banks fail, investors often become fearful of losing their money and may look for alternative investments to protect their wealth. This can lead to increased demand for cryptocurrencies as investors seek to diversify their portfolios and hedge against economic uncertainty.
Additionally, bank collapses can also lead to increased government regulation of the financial sector. In some cases, governments may impose stricter regulations on the banking industry to prevent future collapses, or in this case give assistive measures to minimize the risk of another economic turmoil that causes FUD or otherwise known as Fear, Uncertainty, and Doubt. This increased regulatory scrutiny can spill over into the crypto market, leading to tighter regulations and a more cautious approach from investors and traders.
Another way that bank collapses can affect the crypto market is through the availability of credit. When banks fail, they are no longer able to lend money to individuals and businesses. This can have a knock-on effect on the wider economy, leading to reduced economic activity and a contraction in credit availability. In turn, this can impact the demand for cryptocurrencies, as investors may struggle to obtain the funds needed to invest in the market.
Despite the potential negative impacts of bank collapses on the crypto market, some argue that the growth of cryptocurrency represents a viable alternative to traditional banking systems. Decentralized finance (DeFi) platforms are emerging as a potential solution to the challenges posed by bank failures. These platforms use blockchain technology to provide secure and transparent financial services, hoping to replace the need for traditional banks.
SVB Silicon Valley Bank Office – Image by: Mercury News
Case Study 1: SVB (Silicon Valley Bank) Collapse affecting $USDC crypto stablecoin
SVB is a long-time-running bank, that grew to be the 16th largest in America. SVB’s biggest investors are mostly start-ups, and during the time when interest rates were near zero, they decided to invest their funds in long-term bonds, creating a more stable return. Unfortunately, when interest rates went up, those long-term bond prices went to ruins. This caused fear among the investors. Since they did not diversify the use of the funds, fear of insolvency started to creep into the news – causing their customers to withdraw funds at the same time – eventually leading to their collapse.
Circle, is a private company operating in the blockchain that issues a known stablecoin called USDC – the second-largest stablecoin in the crypto market that is pegged to match with the US Dollar at 1:1. Circle, is said to have a total of $3.3 billion cash reserves in SVB. Since the bank collapsed, and Circle was unable to get a hold of its reserves, FUD started to take place and the value of USDC in the crypto market started to decline. This is the perfect example of a direct impact of the traditional financial market on the crypto market.
Case Study 2: Credit Suisse Bank Collapse causing 5% ave. decline in the crypto market
Following the fallout of SVB (Case Study 1), Credit Suisse, the second-largest bank in Switzerland experienced a significant 30% tumble, causing even further uncertainty and fear in the current market. This FUD catapulted to an average 5% decline in the crypto market. Due to regulation limits, the largest investor for Credit Suisse could not release more funds to save the bank, causing further panic.
As a result, some asset owners started to raise exposure to high-yield investments, which might be difficult to liquidate later on, which will eventually cause the second wave of issues: liquidity mismatch. This example is an indirect impact of the traditional financial market on the crypto market.
In conclusion, bank collapses can have significant impacts on the wider economy and financial markets, including the crypto market. While the exact consequences of a bank collapse on the crypto market are difficult to predict, it is clear that the two are not completely separate entities. As the crypto market continues to mature, it will be interesting to see how it responds to future economic challenges and disruptions.
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