What happened
The stock market may be closed this weekend, but crypto markets trade 24/7, so this is where we're seeing the minute-by-minute market reaction to Silicon Valley Bank's (SIVB.Q 100.00%) collapse and potential rescue this weekend. Crypto values collapsed starting Thursday when the bank run began, but the sentiment has changed in the last few hours.
Between 1 p.m. and 3 p.m. ET, Bitcoin (BTC 0.34%) jumped 4.1%, Ethereum (ETH -0.82%) popped 5.1%, and Dogecoin (DOGE -0.79%) was up 3.2%. That's a big increase in a couple of hours, but it may be warranted today.
So what
As ironic as it may seem, the crypto market is reacting to the potential rescue of Silicon Vallen Bank's depositors, who could have been frozen out of billions of dollars in assets on Monday, potentially starting a bank run across the U.S. This is the kind of centralized financial market crypto was supposed to be escaping from. But, in reality, cryptocurrency has been much more correlated with risky assets than they have been a hedge.
Crypto values started to pop as bids for Silicon Valley Bank were due from potential buyers and reports began to surface that the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) have considered safeguarding all uninsured deposits. The fear is that if deposits are lost, it will lead customers to pull deposits from other small and regional banks, which could collapse the financial system.
As I am writing, there's no resolution to the situation, but crypto markets are reacting as if a deal is imminent. By Monday morning, we will find out whether a buyer has emerged or regulators will somehow save deposits.
Now what
The risk to the financial system is very real if banks start collapsing, but this is an opportunity for investors to take a long-term view. Unlike in 2008 and 2009, Silicon Valley Bank didn't fail because it made bad loans but because depositors pulled $42 billion in assets out in one day. No bank could handle that. And if regulators come up with a solution to help keep depositor money safe, it would ease some market fear.
As for crypto, I think this incident did highlight what a risk asset it remains. Many people have argued that crypto solves risks in the financial system, such as banks failing and regulars not managing systemic risk, but the reality is that the crypto market plunged when a medium-sized bank failed.
If you're invested in crypto as an alternative to traditional currencies, this episode may make you think twice about the investment thesis for crypto. But I think the real value here is in the blockchain and business models that blockchain technology can unlock. As a result, I see the recent drop as a buying opportunity for crypto. But we can all acknowledge that systemic risk still impacts cryptocurrencies in a crisis like this.
