SVB crisis: What lesson crypto investors can learn from US banks fallout?

Many eyes shifted toward the crypto market when the US shut down Silicon Valley Bank in a surprising move. SVB was not just the largest lender of unicorns, startups, and techs but was also home to some of the crypto companies’ reserves. While SVB shocks were enough to send jitters across the market, other lenders’ demise such as Signature Bank and Silvergate escalated the knock-on effect in cryptocurrencies. Majority wonder how much impact the crypto market which has been on a roller coaster ride since last year — will face from this US banks failure.

Rajagopal Menon, Vice President, WazirX said, “the New York Department of Financial Services has taken possession of Signature Bank, a key intermediary between the fiat and crypto world. After the collapse of Silver Gate and SVB banks, which have crypto and VC concentration risk respectively, the move affects stable currencies and crypto.”

When SVB collapsed, crypto market faced a blow after one of the largest operators of USDC, Circle announced that it had $3.3 billion of reserves backing the token which was stored with the bank.

Other major crypto companies such as Coinbase Global Inc. and Paxos Inc. are reportedly exposed to these failed US banks. Signature Bank especially is said to be one of the largest lenders of crypto.

Bloomberg reported earlier that Signature had begun a pullback from digital assets in the wake of the blowup of the FTX exchange but still had $16.5 billion in crypto-related client deposits as of March 8. Signature and Silvergate also enabled fast payments between customers like hedge funds and exchanges, supporting digital-asset liquidity.

As per Menon, the action is meant to prevent banking sector contagion, but uncertainty may worsen credit conditions.

However, the crypto market has been volatile, recording a seesaw pattern in their performance as developments in these banks unfold. Also, US regulators assuring depositors and borrowers of their money in SVB and Signature Bank has played a role in calming the storm of bears in the crypto market.

But in such a case, WazirX VP highlighted key lessons for crypto investors to learn from the US banks’ fallout. These are:

Lessons for investors:

1. Never blindly listen to analysts or media when investing in stocks. Always do your own research and make informed decisions. In Nov 2022, JP Morgan had a buy call on SVB. A look at the balance sheets would have shown that although on paper their Equity look good but if they were to Mark to market the fair value of their Securities portfolio it would create a loss that was almost equivalent to the equity of the business. In fact Forbes put SVB among America’s best banks.

2. Be careful of companies that are highly leveraged, and prefer investing in companies with little or no debt. Banks, by nature, are highly leveraged as compared to tech companies for example which have little to no debt.

3. Diversification is important. While Warren Buffett prefers concentrated diversification, holding only 30 or 40 companies, it is important to have a minimum of 8 to 10 stocks in your portfolio, with no stock accounting for more than 10% of your portfolio value.

4. Protect your capital and avoid permanent losses. Hold great companies that are undervalued, and hold through the volatility. If you bought great companies for less than what they’re worth, it’s impossible to lose money on a collective basis.

“The crypto sector will be closely watching the development, particularly with regard to stablecoins,” Menon added.

On Wednesday, the crypto market erased its early gains and entered into the red zone as banks battered globally over liquidity risks.

At the time of writing, the global crypto market cap traded at $1.06 trillion, slipping by 6.32% over the last day. Bitcoin is the top trending cryptocurrency. The leader of the board, Bitcoin tumbled by nearly 6%. While Ethereum dipped over 7%, BNB shed nearly 4%, XRP dipped nearly 6%, Cardano dived over 11%, while Polygon and Dogecoin also tumbled by nearly 11% and 10% respectively.

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