Silvergate Was Uncle Sam’s Scapegoat Du Jour
 |
| By Alex Benfield |
 |
| By Juan Villaverde |
Starting today, we’re switching up the theme for our Friday Weiss Crypto Daily.
Going forward, each Friday will feature both Juan and I as we review some of the week’s most important news … and how those headlines impact our near and long-term outlooks on the crypto market.
This has been quite an interesting week, specifically regarding crypto regulation and the sector’s ties to the banking industry. What started out as a small story limited to the crypto market and its affiliates in the TradFi realm has now spread further into Wall Street and the banking sector.
You might say to yourself, “I thought Bitcoin (BTC, Tech/Adoption Grade “B+”) was created to help people distance themselves from banks, so why would the crypto market have any ties to banks?”
And you’d be right ... in theory. But practice is always messier.
While it’s true that the point of crypto is to be independent of centralized monetary policy, the industry still has banking needs.
People still need to be able to exchange their fiat for crypto, after all, which is predominantly done on centralized exchanges. And cryptocurrency companies and projects still need funding to build out their products.
Due to the uncertain regulatory nature of the industry, few banks have been willing to stick their neck out and partner with crypto companies to facilitate these needs.
However, when a market exists, eventually somebody will fill those needs and capitalize on that money.
Enter Silvergate bank.
I’ll let Juan take it from here …
Silvergate Was Uncle Sam’s Scapegoat Du Jour
California-based Silvergate was perhaps America’s most crypto-friendly bank. That made it a counterparty to many notorious crypto businesses, including bankrupt crypto exchange FTX and its sister company Alameda Research, which invited a lot of scrutiny from U.S. regulators.
None of these issues are new. But coverage conveniently reached a crescendo last week as a raft of crypto businesses announced they were ending ties with Silvergate.
None of this should surprise you.
I warned my Weiss Crypto Portfolio members last week that we’d see renewed focus on the U.S. government ratcheting up regulatory pressure on crypto-connected businesses across the board.
Silvergate just happened to be Uncle Sam’s target du jour. And even the Biden White House could not resist piling on as
Washington makes a concerted effort to crack down on crypto however it can.
You see, Western governments are effectively bankrupt. And they know it. They got a wake-up call last October.
That was when the UK government went to the brink of bankruptcy before having to be bailed out — and not for the first time — by its own central bank, the Bank of England.
Why was the government almost bankrupt? Because the bond market was in free fall.
Why was it in free fall? Because the BOE was aggressively peddling U.K. government bonds nobody wanted to buy.
And why was the BoE selling bonds? Well, it was part of their inflation-fighting strategy to force interest rates higher.
Britain thus became the poster child for why Western nations cannot fight inflation effectively. Because doing so threatens the house of cards they’ve been building on debt — going back decades.
Basically, if central banks get too aggressive in fighting inflation, their governments go bust.
As governments come to terms with this inescapable reality, they become increasingly aggressive toward anything they see as competition.
And nothing more corrosively undermines the hegemony of a grasping, dishonest government than crypto.
Crypto is an entire financial system, built outside of government purview. It was founded on principles of decentralization, transparency, equality and openness. That puts users and their right to private property, privacy and freedom at the very center of it.
Naturally, qualities like these make crypto wildly popular. Indeed, it’s growing at such breakneck speed, government officials can’t keep up with it — let alone understand it!
This is why Washington’s permanent bureaucracy tasked the Securities and Exchange Commission to go after crypto businesses any way they can.
Will such crackdowns succeed in stopping crypto on its tracks?
Nope. That horse left the barn a long time ago. So, on a longer-term time horizon, do not worry much about whatever issues the SEC can dredge up. Crypto is going to be just fine.
So, that’s the macro situation as we close out the week. I’ll let Alex jump back in for a near-term market update …
Weiss Crypto Daily Weekly Roundup
BTC has now retreated below the $20,000 level due to the ongoing fears. This isn’t all too shocking, however. I’ve said for a few weeks now that a correction should be expected given the long rally we saw at the start of the year.
And sure enough, our Crypto Timing Model agreed. So, where does that leave us now? How long will this pullback last?
Well, we can expect the bulls and bears to battle it out over the current $20,000 level. If the fear, uncertainty and doubt sparked by the latest regulation worries wins out, then we can expect support near the $18,500 level.
Click here to view full-sized image.
But even if the bulls can keep BTC’s price near $20,000, we expect the current panic to keep prices suspended for the near future.
That’s because that FUD has since spread from Silvergate on to Silicon Valley Bank, owned by SVB Financial Group, which is currently experiencing a bank run. It’s only been about 48 hours since this began, and after looking into opening a sale to save itself, Silicon Valley Bank has now been sized by the Feds. This has been an extremly fast moving situation and quite shokcing to many.
This will have run-off effects into the startup world. Banking with SVB was a badge of honor in the startup world and many founders chose to do 100% of their banking with them. Startup payroll checks may not clear in coming weeks. This is still an ongoing situation, and one that we’ll be following closely in the days to come.
I expect that the Federal Reserve is watching the current situation with SVB very closely. It may have to rethink its strategy moving forward as further rate hikes would only hurt the situation at hand.
While Uncle Sam may be indifferent to failures within the crypto industry, stress in the banking sector is no small worry.
Because of this, we don’t see a reason to worry. Still, it is a situation we’ll certainly be paying attention to.
Best,
Alex and Juan
