The news that the influential Silicon Valley Bank, which trades as SVB Financial Group (SIVB -60.41%), is experiencing a liquidity crisis has had a negative impact on cryptocurrencies over the past couple of days. Although this doesn’t directly affect cryptocurrencies, there is a risk of a wider financial impact because many venture capital firms use Silicon Valley Bank, which is why cryptocurrencies are down on Friday.
So What？
The demise of Silvergate Capital and the potential demise of Silicon Valley Bank were the two biggest events of the past week. For many wealthy investors and institutions, Silvergate offered a direct entry point into cryptocurrencies. The company even manages a number of publicly traded funds. But it was perceived as a bank that focused more on cryptocurrencies.
The larger tech ecosystem is more worried about this week’s bank run on Silicon Valley Bank. It is used by many start-ups and provides services small companies need in order to scale their businesses quickly.
The biggest concern here is contagion, or risks cascading from one entity to another. That could lead to less lending and investors pulling back their investments. The venture capital firms in Silicon Valley fuel the tech ecosystem, so anything that affects them could have an impact on a lot of smaller start-ups.
In terms of cryptocurrencies, venture capitalists in Silicon Valley have invested in a number of blockchain start-ups. They might not be able to create the tools and services that will make cryptocurrencies like Bitcoin, Ethereum, and Solana more valuable if they come under pressure from regulators, banks, and ultimately investors.
These ecosystems are interconnected, and this week there is concern that the failure of Silicon Valley Bank will worsen the current crypto winter.
Now What？
Because financial institutions are essential to the functioning of the financial system, the risk to them cannot be understated. As we saw in 2008 and 2009, the economy can be affected when lending abruptly declines or a credit crisis occurs.
There was some good news in Friday morning’s Labor Department jobs report for February. Despite the 311,000 non-farm jobs that were added to the U.S. economy last month, the unemployment rate increased to 3.6% as more people joined the labor force to look for work. The slowdown in the technology sector, the crash in cryptocurrency, and the failure of some banks haven’t yet affected the overall economy.
Long-term investors need to start considering this as a chance to buy reputable cryptocurrencies. Despite the downturn in token values, the crypto industry continues to grow and innovate, which is ultimately what’s going to drive value.
I don’t know if we are at or even close to the bottom, but I am placing a long-term wager on blockchain innovation to prevail. If this crash worsens, I’m looking to become a buyer on the Ethereum and Solana blockchains, where the majority of developers are currently working on projects.
