SVB crisis: What lesson can crypto investors learn from the fallout from US banks?

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Many eyes turned to the crypto market when the US shut down Silicon Valley Bank in a surprising move. SVB was not only the largest lender to unicorns, startups, and tech, but also housed some of the crypto companies’ reserves. While the SVB shocks were enough to send jitters to the market, the demise of other lenders such as Signature Bank and Silvergate intensified the ripple effect on cryptocurrencies. The majority wonders what impact the crypto market, which has been on a roller coaster since last year, will suffer as a result of this failure of US banks.

Rajagopal Menon, Vice President of WazirX, said, “The New York Department of Financial Services has taken ownership of Signature Bank, a key intermediary between the fiat and crypto world. After the collapse of Silver Gate and SVB banks, which have a concentration of crypto and venture capital respectively, the move affects stablecoins and crypto.”

When SVB crashed, the crypto market took a big hit after one of the largest USDC operators, Circle, announced that it had $3.3 billion in reserves backing the token that was stored with the bank.

Other major crypto companies such as Coinbase Global Inc. and Paxos Inc. would be exposed to these failed US banks. Signature Bank in particular is said to be one of the biggest crypto lenders.

Bloomberg reported earlier that Signature began a digital asset pullback following the FTX exchange explosion, but still had $16.5 billion in crypto-related client deposits as of March 8. Signature and Silvergate also enabled fast payments between clients like hedge funds. and exchanges, supporting the liquidity of digital assets.

According to Menon, the action is aimed at preventing contagion from the banking sector, but the uncertainty may worsen credit conditions.

However, the crypto market has been volatile, seeing a bumpy ride in their performance as these banks’ developments unfold. Additionally, US regulators guaranteeing depositors and borrowers their money in SVB and Signature Bank have played a role in calming the bear storm in the crypto market.

But in such a case, the VP of WazirX highlighted the key lessons crypto investors need to learn from the fallout from US banks. These are:

Lessons for investors:

1. Never blindly listen to analysts or the media when investing in stocks. Always do your own research and make informed decisions. In November 2022, JP Morgan had a buy call on SVB. A look at the balance sheets would have shown that although on paper their equity looks good, but if they were to mark up to market the fair value of their equity portfolio it would create a loss almost equivalent to the company equity. In fact, Forbes ranked SVB among America’s top banks.

2. Beware of highly indebted companies and prefer to invest in companies with little or no indebtedness. Banks, by nature, are highly leveraged compared to technology companies, for example, which have little or no debt.

3. Diversification is important. While Warren Buffett prefers concentrated diversification, owning only 30 or 40 companies, it is important to have a minimum of 8-10 stocks in your portfolio, with no stock representing more than 10% of your portfolio value.

4. Protect your capital and avoid permanent losses. Own large companies that are undervalued and hold despite volatility. If you’ve bought big companies for less than they’re worth, it’s impossible to lose money on a collective basis.

“The crypto industry will closely watch the development, especially when it comes to stablecoins,” Menon added.

On Wednesday, the crypto market erased its early gains and entered the red zone as banks globally struggled on liquidity risks.

At the time of writing, the global crypto market cap traded at $1.06 trillion, slipping 6.32% over the past day. Bitcoin is the trendiest cryptocurrency. Board leader Bitcoin fell almost 6%. While Ethereum fell more than 7%, BNB lost almost 4%, XRP fell almost 6%, Cardano plunged more than 11%, while Polygon and Dogecoin also fell almost 11%. % and 10% respectively.

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