The unprecedented injection of liquidity into the market from the Federal Reserve during that period was an attempt to stimulate an ailing economy.
But before that, crypto, which closely tracked the stock market’s movements, went into a downward spiral soon after. Bitcoin crashed from $8,000 to $3,750 in a matter of hours.
It was the “loaded” retail and amateur players that tapped crypto and meme stocks as markets recovered. Eventually, the asset class soared to new heights in 2021. While dramatic blow-off peaks and drawdowns of over 80% are not out of the norm, the last bull run managed to capture the attention of investors, both big and small, like no other.
Several public companies made significant investments in crypto. Overall, it was a record-breaking year for space. While most of those gains have been wiped out, the recent events in the banking sector can’t help but point out how the tables have turned.
Fall of Banks and Financial System
The now-collapsed Silicon Valley Bank (SVB) made it to the Forbes magazine’s annual ranking of the best banks in America. Not once, not twice, but for the fifth year in a row. It was also featured in the inaugural Financial All-Stars list.
But not long after that, everything came crashing down. The regulators took control of the bank following its failure to meet withdrawal demands from depositors. It is worth noting that SVB was the 16th-largest lender in the US, with about $200 billion in assets, and had been operational for 40 years. It was deemed a reliable source of funding for tech startups and venture capital firms.
While its financial position deteriorated over several years, the day SVB announced plans to clean up its balance sheet was the same day Silvergate imploded. The latter committed the same mistakes as SVB, which was enough to spook the startups which banked with the giant.
The shuttering has dragged down international banking stocks. The failure of SVB Financial Group and the other entities shortly thereafter indicates the pervasive risk to the financial system. Regulators definitely have some explaining to do.
The Fragility of Centralization: Circa 2023
Banking authorities in the US, be it Treasury Department or the Federal Deposit Insurance Corporation (FDIC) have been vilifying the crypto industry as a threat to the country’s financial system.
But they failed to point out a much bigger issue at hand that originates from these legacy institutions. Silicon Valley Bank, for one, has had a relatively small footprint in the crypto industry, and its epic meltdown shows that regulators’ fixation on vilifying crypto could be a misguided priority.
This begs a question, is fiat that fragile? Did the structure of the traditional finance system sow the seeds of instability? The jury is out on that one.
While it’s still early to say if the rot will spread to other banks as well, the discussions surrounding the “practicalities of decentralization” have never been louder. And three years after the COVID crash, crypto is still here. It has expanded like never before.