Silvergate Woes Dampen Late Feb Momentum, BTC Price Stares at Consecutive Red Weekly Close
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Bitcoin, Ethereum, and other crypto assets fell in unison late Thursday as investors reacted to an unsettling notice from Silvergate bank. The market maintained the descent course heading into – and coming off – the weekend. Coinglass data shows Bitcoin (BTC) is on track to record a second red weekly close as the market continues bleeding into March from a laceration resulting from February's intensified crackdown on crypto companies. The Californian bank has remained in the headlines in the past 24 hours, with potential new reports around it likely to define the theme of the coming crypto-week.
Here are the latest updates about Silvergate's fate
Bitcoin fell sharply towards its mid-Feb range on Thursday, retreating as low as $22,300 where it found an anchor on Saturday before attempting to flip the $22,600 mark. The rest of the top alts, including Cardano (ADA), Polygon (MATIC), Solana (SOL), Polkadot (DOT), and Avalanche (AVAX), registered losses of somewhat similar weight on Thursday, while a few, like Dogecoin (DOGE) and Litecoin (LTC) printed larger red candles.
The total crypto market consequently fell, erasing the hard-earned recovery efforts in the second half of February when market regulators, including the SEC, descended upon entities operating in the space. The price slumps across the board knocked several billions of the total crypto market cap fell sharply before bouncing back at the $1 trillion mark. Coinglass data shows that over 78,000 traders' positions were liquidated between Thursday and Friday, totaling over $218 million.
The steep price descent was triggered by a chill in the air regarding Silvergate. The crypto-friendly bank drew attention to its financial situation this week after delaying filing its annual 10-K report on Wednesday. The delayed filing specifically raised concerns about a looming bankruptcy filing, leaving the already-ailing digital assets sector in more pain. Subsequent reports from Thursday and Friday confirmed that the US bank is still in financial distress. Silvergate faced similar difficulties in the fourth quarter of 2022, stemming from declining deposits from its crypto clients but got a bailout in the form of a $4.3 billion advance from the San Francisco Federal Home Loan Bank. As part of the agreement allowing the Home Loan Bank to act as a stopgap, the bank's holding company, Silvergate Capital, let go of the firm's securities as collateral.
Silvergate shares traced a significant decline on Thursday, falling nearly 60% before bells sounded on Wall Street. The nosedive, which sent the stock to an all-time low of $5.15 by the end of the day, fanned the flames of an after-close crypto market shed-off. The mid-week happenings around the bank, which provides financial infrastructure solutions and services, prompted its business partners and investors to announce disassociation. The bank, whose viability now hangs in the balance, halted crypto payments on the Silvergate Exchange Network (SEN) platform, justifying the decision to discontinue the service as a “risk-based decision.”
To learn more about Bitcoin, check out our Investing in Bitcoin guide.
FTX contagion overwhelms Silvergate again
Silvergate said in a filing with the SEC that it would be delaying its annual 10-K report for the fiscal year 2022, failing to meet the March 16 deadline, and noting that it would take more than an additional two weeks for them to finish it up. The bank had significant investment-purposed links with Sam Bankman-Fried's empire consisting of the defunct FTX and trading firm Alameda, reporting a substantial net loss – nearly $1 billion in deposits at the time – following the exchange's collapse in November.
Explaining its current situation, Silvergate said it sold some more debt securities in January and February and predicted more losses in the near future. The California-headquartered firm anticipates that these losses will impact its capital ratios. The bank also suggested that the regulatory lights flooding over it are a possible reason it has chosen to make traders and investors alike wait much longer before they can delve into the financials of the crypto service bank.
The bank expects to incur additional losses from the sale of debt securities this year, potentially affecting its regulatory capital ratios. The loss of confidence is becoming more apparent as the bank itself suggested that it may be less than well capitalized, adding that it was evaluating its ability to remain operational over the next twelve months. CEO Alan Lane noted that Silvergate is assessing the potential effect of these recent developments on its ability to sustain its operations in the next year after it issues its financial statements. The bank also conceded that several potential risks could negatively affect its financial stability in the short term, including replication of investor disruption as it happened in Q4 2022 due to bankruptcies and the imposition of stricter regulations on banks providing digital asset services.
Coinbase and other crypto companies reconsider engagement with Silvergate
Silvergate also faces potential liabilities or legal limitations arising from any litigation. It doesn't help that its counterparties, including Circle, Galaxy Digital and Paxos have distanced themselves in light of the news, which could directly affect the bank's deposits. Silvergate, which manages more than $10 billion worth of assets, is federally regulated. Still, the crypto-focused bank has been in difficult financial situations twice recently.
Coinbase said on Thursday it is pulling back on its relationship with Silvergate citing concerns that the institution may not be well capitalized. The exchange, America's largest by trading volume, said it would no longer rely on the bank's services to facilitate customer payments, in a move taken as an abundance of caution. The change took effect immediately but only pertained to transactions in banking with the US dollar, with no bearing on activities involving Pounds or Euros.
Aiming to trim its exposure to the troubled bank, Coinbase said it would proactively implement this change alongside its other banking partners so as to ensure that the customer does not feel any impact whatsoever in terms of liquidity for cash transactions. Particularly, Coinbase is opting to work with New York-based Signature Bank out of an abundance of caution and intends to use this channel for dollar redemptions for its Prime customers.
Coinbase said its detachment from Silvergate was due to recent developments and an abundance of caution, suggesting there is worry things could turn for the worse. Moreover, should it come out that its leverage ratio has fallen below the well-capitalized threshold of 5%, the bank might still be adequately capitalized, but investors and partners alike may not be waiting for long to see how the situation evolves. Silvergate has relinquished billions of assets at a loss to satisfy customer withdrawals, most significantly, a $751 million loss it realized from the sale of debt securities in Q4. Moreover, regulators have been cautioning banks that engage with crypto asset-related entities to be wary of the liquidity risks associated with market vulnerabilities in the sector.
Signature Bank's mid-quarter update shows digital asset client-related deposits have downsized by more than $1.5 billion
Signature Bank also made headlines this week after delivering its mid-quarter update as of March 1 for the first period of the 2023 fiscal year. The report indicated that the bank's spot deposit balances have tanked by roughly $826 million, a decline primarily attributed to deliberate efforts to slash the scale of deposits received from digital asset clients. This year, deposits from crypto clients have slid by $1.51 billion, but excluding digital asset client-related balances, the deposits have risen by $682 million thus far this quarter.
The average deposit balance so far stands at $88.79 billion, which represents a higher value than the closing balance of $88.59 billion recorded at the end of last year but lower than the quarter-to-day average balance of $98.6 billion for Q4 2022. The financial institution had committed to reducing its exposure to crypto assets by as much as $10 billion, though it is not detaching entirely. Chief operating officer Eric Howell told an investor conference last December that Signature wants to demonstrate that it is more than just a crypto bank.
Spot loan balances are also scaling down, consistent with internal strategy
Signature also looked up to its local home-loan bank for nearly $10 billion in the fourth quarter, securities filings show. The bank's spot loan balances have since decreased by roughly $1.71 billion. This reduction aligns with the bank's previously announced strategy to curtail loan balances in its more sizable business engagements. Its loan-to-deposit ratio jumped 12.1% quarter-over-quarter to 83.9% in the last full quarter. Also, Signature Bank once again asserted that it does not trade, custody, or lend against digital assets.
Kraken cuts its reliance on Signature Bank
Like Coinbase, crypto exchange Kraken is reducing its exposure to a specific financial services entity in crypto, in this case, Signature Bank. Bloomberg reported on Wednesday that according to an email sent to users, Kraken will cease using the bank's services for some key financial transactions. The decision came after the bank informed its partners in January that it would no longer support buying and selling digital assets via SWIFT transactions of less than $100,000. Binance, also a member of Signature's blockchain-based, real-time payments platform Signet, was affected by the same directive and is already seeking a new partner for SWIFT dollar transactions.
The report noted that with the change, non-corporate users could no longer complete US dollar deposits to Kraken via Signature from March 15. They have until the end of the month to process any withdrawals. A spokesperson from the latter exchange told Blockworks that its customers still retain a series of options they could use to transact with their accounts, adding that less than 0.1% of Kraken's average monthly users were leveraging the bank's services.
Silvergate's future still in doubts
Heading into the new week, some analysts have placed bets on the bank's stock nosediving further as the scrutiny into banking firms continues. Meanwhile, others are not convinced it will survive the latest blow to its operation as Swiss banks increasingly become potential destinations, according to a recent Bloomberg report.