What Occurred
The banking crisis that occurred in the last week had a far larger negative effect on cryptocurrencies and associated companies than many investors expected it to. Now, the market is praising the federal government’s steps to secure customer deposits.
Shares of Coinbase Global (COIN 10.72%) traded as high as 14.34% higher Monday after starting the day off 5% down. On the cryptocurrency side, Bitcoin (BTC 14.63%) saw a spike of up to 16.9%, and Ethereum (ETH 9.51%) had a notable rise of 13.3%.
So What
Coinbase was particularly hit by the crash of Silicon Valley Bank. The Center Consortium, which holds the USDC stablecoin, is owned 50% by Coinbase, and the entity had $3.3 billion in funds frozen in Silicon Valley Bank. In the event that those funds were not backed up, it is possible that the token would have failed. This could have cost Coinbase a lot of money, but it would have also meant that hundreds of millions of dollars in interest earned from the token would have stopped coming in to the company.
Bitcoin and Ethereum also saw swift gains, partially due to the bank news but mostly due to the announcement by Binance that it would be exchanging $1 billion in stablecoins for Bitcoin, Ethereum, and other tokens. This has created a lot of buying pressure in the cryptocurrency market.
As the prices soared, liquidations pushed them even higher. According to Coinglass.com, $138 million of Bitcoin has been liquidated in the last 24 hours and $96 million of Ethereum has been liquidated. This is similar to a short squeeze that has driven up the prices.
What’s Next
As of now, the most severe news has passed over the banking industry, and the crypto markets are responding to it. However, it is important to remember that cryptocurrencies were created to take advantage of the weak points in traditional banks, not rise and fall together with them.
The next few months will be critical for the crypto industry. Several of the risks that are linked to the banking industry can be dealt with by crypto, and this could help draw in some new users. But the risk profile of cryptocurrencies cannot just be associated with traditional banks, or else there is no point in transitioning.
There are numerous innovative products being built on the blockchain, but the financial disruption of cryptocurrencies is not so well known. Bitcoin did not turn out to be a hedge against inflation in 2022, and over the weekend, it was not a safeguard against traditional banking risks.
This did not stop crypto values from rising Monday, but I still see more questions than answers in the industry.
One answer that we did get is that Coinbase’s USDC business will continue to remain strong after regaining access to the funds it had on deposit in Silicon Valley Bank. The token may experience some redemptions, but I would not be surprised if it established itself firmly in the crypto market, which would be great news for Coinbase’s long-term earnings profile.
SVB Financial provides credit and banking services to The Motley Fool. Travis Hoium possesses positions in Coinbase Global and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Ethereum, and SVB Financial. The Motley Fool has a disclosure policy.