Impacts of Failure of Crypto banks On Bitcoin

March 15, 2023

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Recently, the crypto ecosystem has been in news largely for “not-so-good” reasons. There has been quite a lot of turbulence in the crypto ecosystem but the collapse of Crypto exchanges or Crypto banks has surely been the talk of the town.

Collapse of Crypto Banks

After the bankruptcy of FTX which is still under investigation, three of the popular banks of tech startups have also failed in 2023. Silvergate Capital, Silicon Valley Bank (SVB), and Signature Bank are the crypto banks that have faced several financial issues in recent times. Silvergate Capital which is the central lender for the cryptocurrency industry announced its plan to wind down the operations and liquidate the bank.

On the other hand, Silicon Valley which was considered the backbone for the crypto startups also collapsed after the massive withdrawal of $42 Billion from the depositors. Similarly, Signature Bank for which the cryptocurrency industry has always been the major focus was also seized by the banking regulators. Thus, such instability in the crypto financial institutions will impact the investment landscape and value proposition of Bitcoin too.

Impact of Collapse of Crypto Banks On Cryptocurrencies

Reportedly, such events caused further chaos in the broader crypto market leading to the breaking of Circle’s USDC Stablecoin with $3.3 Billion stuck with Silicon Valley Bank (SVB). However, the cryptocurrency market sees Governments providing support for depositors in the bank as a ray of hope. Recently the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) disclosed their intentions to protect the money of SVB and Signature Bank’s depositors.

In the aftermath of these institutional developments, Bitcoin and other cryptocurrencies suffered a lot. According to the reports of Fast Company, Bitcoin, Solana, and Ethereum went down by almost 10% last week. Alongside, Binance was found to be done by nearly 8% while Dogecoin, the popular Altcoin dropped more than 10% today. However, these entire events spark instability in the Stablecoin market.

However, what cannot be neglected is that even the first and highest valued Crypto asset – BTC (Bitcoin) that is not trustless, decentralized, and not controlled by anyone cannot stay a loop of the turbulence in the crypto ecosystem. It also gets affected by the single point of failure in the crypto industry because Altcoins and crypto–based businesses are largely centered on this popular cryptocurrency. Thus, Bitcoin goes through several ups and downs over the year and has weathered storms more badly than this one. However, it has also come back stronger.

 Is Such Crypto Instability The Result Of Vulnerability Of Stablecoin?

The stablecoins are the subset of the crypto ecosystem and they are pegged to the value of real-world assets. Thus, the unusual financial conditions in the economy impact the value of underlying assets which in turn the value of stablecoins. Evidently, the majority of the crypto turbulence in 2022 and 2023 originated due to the vulnerability of Stablecoin. In May 2022, the Terra USD collapsed followed by BUSD and USDC. Alongside, the DAI, the popular dollar–pegged virtual currency also traded as low as 90% last week. Moreover, Coinbase and Binance also paused their conversion operations from USDC –to – Dollar temporarily. Evidently, stating that somewhere the journey of institutional collapse begins with the vulnerability of stablecoins.

Can Crypto Industry Rebound After Institutional Collapse?

Followed by the failure of these financial institutions, Bitcoin prices witnessed a harsh reality. However, the Federal Government can be seen taking preventive steps to limit the potential banking crisis from expanding.  As a result of this news, cryptocurrencies seem to make up the ground they initially lost with the collapse of such institutions.  Bitcoin and Ether grew nearly 10% higher in the last two days.

Alongside, the Circle’s USDC Stablecoin had also regained its dollar peg after making the best use of its corporate resources. The USDC and DAI have also shifted back to the dollar –peg. This can be traced back to the involvement of regulators and institutions in addressing these turbulent events and coming up with stronger regulations and policies. But the biggest concern is, “Would this take away the essence of decentralization and trustless from the crypto ecosystem in the long run ?”

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