Cryptocurrency Analyst
Summary: In no more than one week, two of the industry’s key banks namely Silvergate and Signature have ceased operations, leaving crypto somewhat separated from the traditional banking system. This may hurt the market’s liquidity and boost fear that crypto is about to be thoroughly isolated from traditional finance. Nonetheless, the largest cryptocurrencies trade higher, likely as the market expects fewer interest rate hikes for central banks not to negatively impact bond positions held by other banks.
The past week has been fairly tough for the crypto industry, given the closures of the two most vital banks for the ecosystem. On Wednesday last week, Silvergate Bank announced its plan to shut down operations and liquidate its bank following a liquidity crunch in the time following the collapse of FTX. Besides Silvergate, crypto-friendly Signature Bank closed its doors on Sunday, as the Department of Financial Services of New York decided to take control of the bank. Barney Frank, a former congressman, and Signature Bank board member stated in an interview that: “I think part of what happened was that regulators wanted to send a very strong anti-crypto message.” The New York Department of Financial Services denied this yesterday.
Silvergate and Signature were pivotal in bridging crypto with the traditional banking system by serving the banking needs of practically every crypto firm, contrary to the strict no-crypto stance of most banks. This causes now even more particularly small US-based crypto firms to struggle to obtain a bank account, limiting innovation in the space. The two banks did not only onboard crypto firms, but they also advanced the efficiency and liquidity of the market by each allowing market makers and other institutions to instantly transfer US dollars to and from exchanges and OTC desks, known as the Silvergate Exchange Network (SEN) and Signet, respectively. As we wrote in our crypto research note on Wednesday last week, at what point Silvergate’s SEN was already closed, the absence of the SEN and Signet is likely to limit liquidity and market efficiency at the expense of market participants, simply because market makers, OTC desks, and institutional investors can no longer provide liquidity as efficient as previously.
It does not make sense to speculate on a potential hidden incentive of the regulators to take control of Signature Bank, however, we can surely conclude that the industry particularly in the US but as a matter of fact in the whole world is worse off than it was a few weeks ago. In our view, market participants broadly underestimate the role that Silvergate and Signature have played in providing banking services to the whole ecosystem, including ensuring high liquidity and an efficient market. This will take years to rebuild, yet there are no guarantees that it de facto will be successfully rebuilt, particularly as these two collapses may frighten other banks from being heavily involved in crypto. We are likely looking into several years, in which the crypto market is more isolated from traditional finance than it has been for years till now.
Since a local low of 19,600 (BTCUSD) and 1,370 (ETHUSD) on Friday, both Bitcoin and Ethereum recorded significant gains to a local high of 26,500 and 1,785 yesterday, respectively. Some of those gains have since been erased, yet both trade much higher than on Friday, as Bitcoin trades at 24,200 and Ethereum at 1,630. The substantial recovery is likely not an indication that the market thinks we are out of the woods in terms of the implications of Silvergate and Signature, but rather that the market may expect that the FED and other central banks are more limited in additional interest rate hikes to not negatively impact bond positions of more banks, potentially creating contagion across the financial industry. Similar to particularly technology stocks, crypto is greatly sensitive to interest rates, so this perception of limited future hikes may have driven this swift recovery.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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