Why crypto's go-to bank collapsed

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CNN New York --

Yesterday saw a classic bank run when Silvergate Capital (the US-based lender for crypto companies) announced that it would cease operations and liquidate itself.

ICYMI: Silvergate was a regional bank in Southern California for the majority of its existence. It shifted to crypto in 2018, after realizing that many young digital asset companies were having difficulty establishing relationships with large mainstream banks. Silvergate was positioned as a conduit for these companies, which other institutions saw with suspicion and disdain. This was a smart business move. Silvergate was too keen on crypto and ended up being overexposed to the crash that started last year.

Max Reyes, Bloomberg's chief economist, writes:

"After firmly adhering to the new crypto world, the bank had placed itself at risk. When the sector's prospects deteriorated, Silvergate had no other business to turn to.

The bank's shares fell 98% from their high in November 2021. The global crypto industry lost two-thirds its value over the same time, from a $3 Trillion market cap to $1 Trillion.

BIG PICTURE

You're currently in the crypto business and you are under the shadow of Sam Bankman-Fried. He was an entrepreneur who became a pariah after his crypto empire collapsed last January. This event caused a wave of bankruptcies that put the industry under surveillance.

Traditional finance professionals and regulators had previously considered crypto a nuisance. However, FTX's fall and subsequent criminal indictments made the market radioactive. You could end up in serious trouble if you got too close to FTX.

"There's an old saying that says if you lay down with dogs, you'll wake up with fleas" -- and that's exactly what happened with Silvergate," John Reed Stark, a prominent crypto critic and ex-head of the SEC Office of Internet Enforcement, said to the Wall Street Journal. Silvergate's demise was a "cataclysmic" event for crypto industry, he said.

Silvergate has not been accused of wrongdoing in relation to its ties with FTX. However, the bank acknowledged that it was being investigated by regulators as well as the Justice Department.

MY TWO Cents

There are no cards on the table. I'm neither pro-nor anti-crypto. It is something I find skeptical, just as I am fascinated by large amounts of money and zealotry.

Bullish analysts have pointed out, as expected, that Silvergate was a bank that overexposed itself to one industry and had poor risk management. Anything to avoid blaming crypto.

Marcus Sotiriou, analyst at GlobalBlock, stated that Silvergate's collapse was not due to crypto problems. "Silvergate's collapse resulted from...not having enough money, which led to the shortage of capital from the bank ran.

Yes, 100% -- Silvergate should be diversifying rather than putting all its eggs into the crypto basket. It is widely understood that this basket is full of broken glass and spikes, which can lead to extreme swings.

There's also a reason why the tightly knit network of crypto giants all came to Silvergate. It was not something that other, more well-managed banks could stomach.

I have heard it a thousand times. It wasn't crypto's fault that FTX crashed. It was one bad apple, an old-fashioned scam. It was almost the same story last year, when Terra/Luna crashed last spring, wiping out billions of dollars overnight. Don't blame crypto, those were toxic algorithmic stabilizecoins and you shouldn't be able to trust them. We can't help but notice that reckless investors were able to deceive well-meaning investors by using the regulatory frameworks.

All of these stories contain a kernel or truth, but it is becoming harder to see the truth as the crypto dominoes continue to fall.