From cryptocurrency to stocks…Risk assets ‘crash’ in the aftermath of SVB
Following the liquidation of Silvergate, a bank specializing in cryptocurrency, the bankruptcy of Silicon Valley Bank (SVB) caused a shock in the cryptocurrency market. With the hawkish (preferring austerity) remarks by U.S. Federal Reserve Chairman Jerome Powell, sentiment to avoid risky assets is rapidly spreading throughout the financial market.
According to the Financial Times (FT) on the 11th, Circle, the issuer of stablecoin “USD Coin” (USDC), announced the previous night that $3.3 billion in reserves were tied to SVB and could not be withdrawn. The amount of deposits that can be protected by the Federal Deposit Insurance Corporation (FDIC) is up to $250,000 per account.
Since then, cryptocurrency exchanges Coinbase and Binance have temporarily suspended USDC-related services, and USDC prices have plunged to a record low of $0.86 during the day. The one-on-one pegging (value linkage) has been broken due to a surge in investors who want to exchange USDC for dollars.
USDC is a stable coin that links its value to the U.S. dollar one-on-one, with a market capitalization of $42 billion. It is the world’s second-largest stable coin after Tether (USDT) and fifth-largest among all cryptocurrencies. The $3.3 billion tied to SVB is about 8% of the total reserve.
In addition to Circle, cryptocurrency-related companies such as Panther Capital, BlockFi, Layer Zero, Moonbird’s parent companies Proof, Yuga Labs, and Ajouki are said to have deposited funds in SVB.
Earlier on the 8th, Silvergate Bank, which was suffering from the aftermath of the FTX collapse, decided to voluntarily liquidate. On the same day, Fed Chairman Powell hinted at a big step (a 0.5 percentage point rate hike) at a congressional hearing, saying, “We are ready to speed up the rate hike further.”
Amid the ensuing shock, risk asset avoidance sentiment is rapidly spreading throughout the financial market. SVB’s stock price plunged more than 60% on the 10th, the day of bankruptcy, and the market capitalization of the four major U.S. banks based on assets evaporated a total of $52 billion. On the same day, the price of Bitcoin, a cryptocurrency, collapsed around USD 20,000.
The U.S. stock and cryptocurrency markets are expected to show extreme volatility this week amid concerns that system risks may be transmitted across the banking sector. The Volatility Index (VIX) of the Chicago Board Options Exchange (CBOE), called the fear index, has soared to a three-month high.
Jim Bianco, CEO of Bianco Research, said, “It is impossible to establish a position this week due to multiple risk factors at the same time. The cryptocurrency industry is likely to have bigger problems sooner or later, he said. “What the market wants is to confirm that there is no transmission from the SVB shock and the Fed controls the pace of austerity, but it will get only one or neither.”