Food for thought: SVB Collapse & Unanswered Questions
Silicon Valley Bank [SVB], founded in 1983 and currently the 16th largest bank in the United States with $210 billion in assets, has collapsed in the second-largest bank collapse in American history. This article will discuss what happened, how it will affect the economy, and particularly the crypto industry, which is heavily backed by venture capitalists [VCs].
SVB primarily supported small- and medium-sized businesses [SMBs] with financial solutions such as loans for acquisitions or projects. However, it recently took strategic actions that would take a $1.8 billion loss on bond sales. This was due to the unfavorable macro environment, including a sharp increase in interest rates over the past year, a decrease in the value of bond investments, balance sheet management errors from overallocation into long-term bonds, and heavy exposure to the tech sector.
The ripple effects of this collapse will be felt in the SMB-driven economy, particularly among companies that are VC-backed and rely on SVB for loans and to hold their operating cash. This is particularly relevant for the crypto industry, which is heavily backed by VCs. The collapse of SVB has made it apparent how this affects crypto.
- Several crypto firms are involved, including BlockFi, a failed crypto lender that has $227 million in funds held at SVB, not insured by the FDIC.
- Circle, the issuer of the world's second-largest stablecoin USDC, claims that its operations will continue as normal, but SVB was used to manage USDC's cash reserves.
- Pantera Capital may have an unknown amount of exposure to SVB's collapse, as SVB is a custodian of its funds.
- Avalanche has $1.6 million exposure to SVB, while Yuga Labs claims to have "super limited exposure" to SVB.
- Proof Collective, a leader in NFTs, claims that the potential loss would not affect the security of customers' assets or Proof's roadmap.
- Nova Labs, the startup behind decentralized network and internet provider Helium, has an undisclosed amount in SVB.
This collapse comes at a time of startup turmoil, as Silvergate Bank was the first to fall on March 8th, and SVB began to show signs of trouble shortly after. This could put some crypto companies in limbo as they now have restricted banking facilities. Negative momentum is growing, as USDC cut ties with Silvergate Bank. It is unclear how far this contagion could spread within the VC-backed industry and on a macro level.
In conclusion, diversification is essential in times of economic instability. As the collapse of SVB has shown, it is critical to spread risk across multiple banking institutions to prevent heavy losses if one collapses. The ripple effects of this collapse will be felt across the economy and particularly in the crypto industry, which is heavily backed by VCs.
