What happened
The banking crisis of the last week had a bigger negative impact on cryptocurrencies and related companies than a lot of investors anticipated it would. And right now, the market is cheering the federal government's moves to backstop customer deposits.
Shares of Coinbase Global (COIN +1.32%) traded as much as 14.34% higher Monday after starting the day down 5%. On the cryptocurrency side, Bitcoin (BTC +4.34%) was up as much as 16.9%, and Ethereum (ETH +3.02%) popped as much as 13.3%.
NASDAQ: COIN
Key Data Points
So what
Coinbase was particularly impacted by the collapse of Silicon Valley Bank. The Center Consortium, which runs the USDC stablecoin, is 50% owned by Coinbase, and the entity had $3.3 billion in funds stuck at Silicon Valley Bank. Had those funds not been guaranteed, it's possible the token could have collapsed. That might not have cost Coinbase a lot of money, but it would have meant hundreds of millions of dollars in interest income from the token would stop flowing to the company.
Bitcoin and Ethereum obviously rose swiftly as well, in part because of the bank news, but also because Binance said it will convert $1 billion of stablecoins to Bitcoin, Ethereum, and other tokens. This will create tremendous buying pressure for the cryptocurrency market.
As prices rose, liquidations fueled further buying. According to Coinglass.com, $138 million of Bitcoin has been liquidated in the last 24 hours and $96 million of Ethereum has been liquidated. That's like a short squeeze pushing values even higher.
CRYPTO: BTC
Key Data Points
Now what
For now, the worst news is behind the banking industry, and crypto markets are reacting. But it's worth pointing out that cryptocurrencies were built to take advantage of this kind of weakness in traditional banks, not rise and fall with traditional banks.
I think the next few months will be important for the crypto industry. Some of the risks associated with the banking industry can be addressed by crypto, and that could help attract some new users. But the risk profile of cryptocurrencies can't just be correlated with traditional banks or there's no point in making the move.
There are absolutely innovative products being built on the blockchain, but the financial disruption of cryptocurrencies is less known. Bitcoin proved not to be a hedge for inflation in 2022, and over the weekend, it wasn't a hedge to traditional bank risk.
That didn't stop crypto values from rising Monday but I see more questions than answers from the industry.
One answer we did get is that Coinbase's USDC business will keep going strong after regaining access to the funds it had on deposit at Silicon Valley Bank. The token may see some redemptions, but I wouldn't be surprised if it becomes a mainstay in crypto, which would be good news for Coinbase's earnings profile long term.
