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Bitcoin tumbles, as Silvergate Bank’s collapse highlights the biggest threat to U.S. crypto industry

MarketWatch logo MarketWatch 3/9/2023 Frances Yue
© Terrence Horan, Dow Jones
DISTRIBUTED LEDGER

CORRECTION: An earlier version of this article incorrectly described Signature Bank as a crypto lender. The article has been corrected.

Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Major cryptocurrencies tumbled Thursday after Silvergate Capital Corp  on Wednesday said it intended to wind down operations and voluntarily liquidate its subsidiary Silvergate Bank, a crypto-friendly lender, a week after the La Jolla, Calif.-based company said in a regulatory filing that it was at risk of “being less than well-capitalized.”

I spoke to Matt Hougan, chief investment officer at Bitwise Asset Management, who said the Silvergate woes point to “the biggest threat” for the crypto industry in the U.S.

As always, find me on Twitter at @FrancesYue_ to share any thoughts on crypto, this newsletter, or your personal stories with digital assets.

The Silvergate woes

The liquidation of Silvergate Bank might accelerate a “concerted effort to wall off the U.S. banking system from the crypto industry,” said Bitwise’s Hougan. Such efforts will introduce more risks to the crypto market, according to Hougan. 

See: Silvergate Capital stock tanks as company plans to wind down its crypto-friendly bank

Silvergate’s collapse means the end of a key player that enabled banking for many crypto companies, and is likely to intensify the regulatory scrutiny around banks’ relationship with digital assets entities, noted Hougan. 

Still, it is fortunate for the crypto industry that Silvergate’s liquidation is happening recently, instead of a few years ago, when the lender was arguably the only bank that was willing to work with crypto clients in the U.S., according to Hougan. 

Banks have traditionally been reluctant to provide services to crypto entities, partly due to a lack of regulation, according to industry participants. Founded in 1988, Silvergate started taking crypto clients in 2013, when the lender began to see rapid growth.  

Now, even though the crypto industry will be hit by Silvergate’s crash, it has grown large enough to weather out the demise of one bank, said Hougan. 

New York-based Signature Bank said Thursday it’s maintaining a “strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.” Shares fell more than 12% on Thursday amid a broad bank selloff in the wake of the announced Silvergate winddown and as shares of SVB Financial Group plunged.

Signature Bank provides deposit services for its clients’ digital assets, but does not invest in, does not trade, does not hold on its own balance sheet or provide custody of digital assets, and does not lend against or make loans collateralized by such assets, the company said.

Some large traditional institutions such as JPMorgan Chase & Co have also been working with a few crypto companies. 

See: Signature Bank says its financial position is ‘strong’ but stock falls anyway

 “The global banking system is going to find a way to have crypto as a customer,“ said Hougan. “I suspect we will find a way in the US for the more regulated parts of the crypto industry to have more stable traditional banking relationships,” noted Hougan.

The crypto market capitalization stands at close to $1 trillion, down over 60% from its all-time high of $2.8 trillion in November 2021, while still up massively from below $400 billion in 2019, according to data from CoinMarketCap. 

JPMorgan and Gemini

Crypto exchange Gemini Trust has denied that JPMorgan is ending its banking relationship with the company, which was reported by CoinDesk earlier Wednesday citing an anonymous source. “Gemini’s banking relationship remains intact with JPMorgan,” the crypto exchange wrote on Twitter. 

JP Morgan reportedly took on Gemini and Coinbase as customers in 2020, according to a Wall Street Journal article

Representatives at Coinbase didn’t respond to MarketWatch’s request seeking comment. The exchange told CoinDesk that its banking relationship with JPMorgan remains intact.

See also: Fed’s Barr: Recent move to safeguard banks from crypto doesn’t mean the central bank is against innovation

SEC’s action against BKCoin

The U.S. Securities and Exchange Commission on Monday announced an emergency action against Miami-based investment adviser BKCoin Management LLC and one of its principals, Kevin Kang, alleging that they are in connection with a crypto-asset fraud scheme.

The SEC said in a statement that it successfully obtained an asset freeze, appointment of a receiver, and other emergency relief. The emergency action was filed under seal on Feb. 23 and unsealed Monday, according to the SEC. 

BKCoin raised around $100 million from at least 55 investors to invest in crypto between October 2018 and September 2022, but the firm and Kang allegedly used the money for personal use and Ponzi-like payments, according to the SEC. Ponzi schemes refer to frauds that generate returns for earlier investors with money raised from later investors. 

MarketWatch’s Anushree Dave wrote more about it here. 

Crypto in a snap

Bitcoin lost 9% in the past week and was trading at around $20,806 on Thursday, according to CoinDesk data. Ether tumbled 7.5% in the same period to around $1,482.

Biggest gainers Price %7-day return
LEO Token $3.37 1%
USDD $1 0.8%
TrueUSD $1 0.4%
Edgecoin $1 0.4%
cUSDC $0.02 0.4%
Source: CoinGecko
Biggest decliners Price %7-day return
Stacks $0.59 -40.3%
SingularityNET $0.35 -35%
Render $1.09 -30%
Frax Share $8.39 -29.8%
Mina Protocol $0.69 -20.6%
Source: CoinGecko
Crypto companies, funds

Shares of Coinbase Global Inc. declined 8.2% for the week to around $58.51. MicroStrategy Inc. lost 15% thus far on the week, to $215.08.

Crypto mining company Riot Blockchain Inc. dropped almost 10%, to $5.59 as of Thursday. Shares of rival Marathon Digital Holdings Inc. tumbled 11.2% to $5.56 over the past week. Ebang International Holdings Inc. traded 12% lower over the past week to around $6.18.

Overstock.com Inc. shares retreated 3.5% to $18.11 over the week.

Shares of Block Inc. formerly known as Square, slid 4.9% to $74.25 for the week thus far. Tesla Inc. shares went down 8.6% to $174.43.

PayPal Holdings Inc.’s stock gained 2.7% over the week to trade at around $76.09. Nvidia Corp.’s edged up 0.9% to $235.24 for the past week.

Advanced Micro Devices Inc. shares went up 4.7% to $84.22 for the week.

Among crypto funds, ProShares Bitcoin Strategy declined 8% over the week to $12.68 Thursday, while counterpart Short Bitcoin Strategy ETF rallied 8% to $30.90. Valkyrie Bitcoin Strategy ETF lost 8% over the past week to $8.09, while VanEck Bitcoin Strategy ETF fell 8.4% to $20.59.

Grayscale Bitcoin Trust gained 7.2% over the past five days to $11.79 on Thursday.

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