The collapse of several banks - Silvergate, Signature Bank, Silicon Valley Bank, Credit Suisse, and First Republic - has left a significant number of people concerned about their deposits, questioning the strength of the existing financial infrastructure. This week Pac West bank stocks dropped in value more than 40%.
While once the domain of free-market capitalists and right-wing libertarians, the policies of quantitative easing and centralized banking are now queried by those of a more moderate disposition.
A systemic collapse could herald increases in the price of cryptocurrency and NFT tokens, but the effects could be catastrophic. Strategic thinking is still required to transfer from fiat to crypto in the safest manner possible, choosing the best possible projects and ecosystems.
The Banking Crisis - An OverviewSilvergate Bank shut its doors in early March 2023. FTX was a major client of Silvergate and it was no real surprise that it ultimately went under, losing over $1 billion in a single quarter after intense customer withdrawals. But it was the start of a chain of banking failures.
Two weeks later, Signature Bank and Silicon Valley Bank (SVB) both collapsed, within days of one another. Both catered to technology startups, particularly in the sphere of cryptocurrency. In the case of SVB, what happened was that the Federal Reserve raised interest rates, and a large number of depositors started to withdraw their money. This forced the bank to sell its bonds at a discount, ultimately rendering it insolvent. SVB ultimately misjudged its interest rate risk.
The Federal Reserve, the U.S. Treasury Department, and Federal Deposit Insurance Corporation agreed to insure the deposits in excess of $250,000, even though there was no initial insurance for accounts. They also covered Signature Bank, which was taken over by the New York Department of Financial Services. Three major banks - “SSS” - all collapsed within 2 weeks.
On March 16th, First Republic Bank was bailed out in a private rescue plan from the major Banks. As of April 28th, there are even more talks about a second rescue plan for First Republic, a further cause of concern. Customers pulled over $100 billion in withdrawals amidst the crisis. Around May 1st, First Republic was seized by regulators and sold at a discount to JPMorgan Chase.
On March 19th, another bank failed, this time outside the USA, as Credit Suisse was rescued by UBS. Credit Suisse is a major international bank headquartered in Switzerland. With Credit Suisse, it was a $68 billion bank run on deposits that triggered the collapse.
On May 4th, local Californian bank Pac West stocks dropped dramatically. It sank 45% in early trading and was halted for volatility. The bank management now doing everything to bring back shareholders’ value. So the trend of the traditional banks collapsing continue.
Decreased Trust In The Banking SectorThe bailouts came at an enormous cost. Guaranteeing deposit insurance at SVB and Signature Bank has cost the Federal Reserve $140 billion. The Swiss state has guaranteed $225 billion to UBS, the institution that took over Credit Suisse. Meanwhile, bank loans are at record highs in the USA. All this indicates a potential recession and severe difficulty in obtaining loans from banks, who will be more reluctant to lend.
While it can be made to sound very technical and complex, the reality is much simpler. When people lose faith in banks, for any reason, they withdraw their money quickly. The bank then has to liquidate assets (at a discount) to cover its existing positions, which accelerates the trend as customers withdraw even more. This is a typical bank run. Social media exacerbates this problem because news can spread so quickly in the modern era.
Of course, the Federal Deposit Insurance Corporation (FDIC) does quite a lot to reassure people. Customer deposits are safe, possibly even in instances where the bank has no insurance (such as Signature and SVB). But with recent events, alongside customer frustration with banks and their fees, many are still turning to crypto and Web3 finance, which is proving more flexible, and yet more stable.
Alternative Banking Options Via Web3 SolutionsThere are multiple alternatives to using the banking infrastructure and many ways to manage your funds. In fact, pretty much anything that can currently be done on the legacy architecture can be done on a faster, safer, more efficient blockchain. Thousands of industry professionals, analysts, and mathematicians can come together to make a more innovative and flexible solution.
Stoic AI, for instance, supplies users with crypto trading bots that manage multiple portfolios based on risk tolerance levels, without any of the emotionality associated with retail investing. The app connects to Binance or Coinbase via API so funds never leave your account. The company behind the product, Cindicator, has been in operation since 2015 with over $130M in assets under management from 15,000+ customers.
Much like Modern Portfolio Theory (MPT) within the capital markets industry, Stoic can tune your portfolio to the risk level you are comfortable with. Current portfolio options include conservative, balanced, and volatile, each containing its own set of strengths. Only the top 30 cryptocurrencies by market cap are traded. All of this is done through emotionless automation at a fraction of the cost of traditional hedge funds and with much greater APY potential.
And this example only applies to portfolio management. There are a plethora of Web3 options that cater to various industries including crypto lending, collateral, mortgages, house rentals, yield farming, insurance, international finance, microfinance, charitable donations, privacy-based tokens, and more. And all of this can generally be achieved with less red tape and more efficiency as compared to the centralized banking model.
All Paths Point To A Crypto Price Increase & Renewed InterestUltimately, even if a systemic crisis is averted, it will still result in a rise in cryptocurrency (the price has already risen significantly). This is due to the fact that commercial banks are only being saved with money printed by central banks, resulting in even more inflation, which encourages more people to purchase commodities and cryptocurrencies.
Bailouts can only be done for so long before the system crashes completely as it continually devalues the currency. A “saved” bank comes at a huge cost. This cost is acceptable now and again, but if a multitude of banks has to be propped up, the end result is a government-dominated state with a poor economic climate.
All this can only lead to a renewed interest in cryptocurrency products and services, as existing institutions fail to provide adequate financial safeguards for the population.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
