The recent collapse of Silicon Valley Bank (SVB) and Signature Bank has had a noticeable impact on global markets. While these banks may be niche and small in size, their failure and subsequent fallout could have wide-reaching consequences for the fintech industry and beyond.
SVB’s Collapse
On March 10th, after a failed attempt to raise capital, SVB was taken over by the Federal Deposit Insurance Corporation (FDIC) and will now be sold or liquidated. The bank’s collapse is just the latest in a string of niche bank failures, with Silvergate Bank failing earlier this year.
Even though SVB was not considered a risky bank, once people started to smell blood in the water, bad things happened. John Wu, the president of Ava Labs, stated that the SVB collapse was a bank run, and his prediction turned out to be correct.
Signature Bank’s Troubles
In heavy trading on March 10th, Signature Bank’s stock price dropped 21.11% to $69.65, after trading near $61 earlier in the day from a previous close of $90.76. Signature denied having any capital issues, much like SVB did earlier in the week.
The recent collapses of niche banks have had a direct impact on the crypto markets, which are both emerging fintech and a volatile asset. As we’ve seen, the crypto markets have come under strong selling pressure, with bitcoin falling below $20,000 for the first time since January.
Lack of Equity in the Blockchain Development Space
Assets in the tech startup and Venture Capitalist (VC) space, much like the subprime mortgage bond market of 2008, are largely illiquid. Shares in small companies aren’t traded with a market-making mechanism, and there is no centralized price-setting exchange. In the crypto space, the problems with valuation grow. In most cases, a token isn’t equity, as tokens are like tickets to a carnival, not ownership of the carnival itself.
When a company gets into trouble and needs money, it can sell equity. While many people think of tokens like stock, in most cases, they are not. Of course, some companies in the blockchain space do have a corporate structure, but like most startups, they are small companies that place shares in fundraising rounds with venture capitalists, and these shares are generally illiquid investments. When times are good, these private shares are easy to sell, but in a rough market, like sub-prime bonds, they may as well be worthless.
A company that can’t take on debt or sell equity has to rely on revenue to fund its operations. For many early-stage tech companies, this simply isn’t an option. In a worst-case scenario, the emerging tech sector could implode, and the intellectual property generated will be put on the market at fire-sale prices.
The Role of Liquidity
Any market thrives or dies on access to liquidity, and cryptos are no different. Cryptos are dependent on capital flows in the legacy financial system, and in fact, they may be a leading indicator for the direction of risk assets in the wider world of finance.
There is no organic liquidity in the blockchain space from a fiat perspective. Fiat money flows into crypto and blockchain in two main channels – either from retail investors or institutional investors. While more people are willing to accept cryptos as a means of payment all the time, as prices decline in fiat terms, that trade becomes less attractive from a fiat point of view.
Smart Money Will Look for Distressed Assets in 2023
The last time bitcoin and crypto faced a prolonged bear market, it was a different industry. PayPal was blocking anyone who was near crypto, and the idea that major banks would offer crypto custody services was absurd. Now, big money is looking for good deals. Smart money bought Apple Computer shares at $2 a share after the dot-com collapse. The same smart money will be looking for distressed assets in 2023, and given the current market conditions, that money will be spoiled for choice.
In conclusion, the collapse of niche banks has had a direct impact on the crypto markets. As liquidity evaporates, and a flight-to-quality trade emerges, this lack of equity may become an Achilles heel for the blockchain development space. The idea behind bitcoin was decentralization, and many blockchains that exist today don’t have owners. You can use the platform, but in one way or the other, you can’t own it. When times get hard, and liquidity dries up, this makes raising funds difficult.
