What does the collapse of three banks, including the Silicon Valley Bank, mean for Bitcoin?
Three bankruptcies sent shockwaves through the world of finance recently. First Silvergate, a bank that handled a high percentage of all transactions between crypto exchanges, went belly up. Then the Silicon Valley Bank, the preferred bank of tech start-ups and venture capitalists, was shut down by US authorities.
As this bank held around 10% of the dollar reserves of the USDC, this popular stablecoin crashed from its target of one dollar to 89 cents. And finally, Signature, which also handled large money transfers between crypto exchange, was seized by authorities, too.
All three banks were victims of bank runs: when rumours spread that a bank is in trouble, customers withdraw their money and the bank becomes insolvent. Even if the rumors are exaggerated, a bank run can kill a bank, however good its business may be.
The reason for this is a misconstruction of our current banking system. Banks keep only a small portion of the money they owe their customers in their vaults. They assume that not everyone wants to access their money at the same time and speculate with it. This is called a “fractional reserve system”. A more accurate word for it would be fraud.
Governments cover this up and calm their voters by promising to take over losses, but only up to a certain amount. In the USA the deposit insurance is 250,000 US dollars. This is a drop in the ocean for startups that park the millions they receive from venture capital companies at the Silicon Valley Bank.
However, when the government shut it down, they decided not to follow their own rules but to reimburse all deposits. The billionaires who invest in Silicon Valley startups are good buddies with policymakers in Washington DC. They claim that “this is not a bailout,” but of course it is. When the government and its central bank create more money out of thin air, whether it is to finance wars or to bail out banks, prices rise and wages and savings lose value. When governments and banks pull together, it is always the average citizens who pay the bill.
At first these bankruptcies were bad news for Bitcoin. It plummeted to 19,600 USD. But soon people realised how vulnerable the banking system really is. More and more seem to understand that Bitcoin is a better alternative. Its price went up more than 30 percent in only a few days. While I write this it is still climbing.
It should come as no surprise that Bitcoin, which was invented to replace banks, is benefiting from a banking crisis. Some people fear that the collapse of the Silicon Valley Bank may lead to a global financial crisis like in 2008. But I don’t expect a really big banking crisis very soon. Silicon Valley Bank is popular with tech startups, but in the U.S. it ranked only 16th among the largest banks.
Silvergate and Signature were significant in the crypto world, but relatively small compared to other banks. Their bankruptcy may lead to some temporary problems for crypto exchanges, but I assume other banks will soon take over their business. Signature’s ex-director Barney Frank claimed in an interview, that his bank was shut down by the government to “send a message” to other banks that they should better not deal with crypto. The authorities deny this, but one point is clear: Bitcoin’s Achilles heel is its need to interact with the fiat money system. The sooner we achieve a pure Bitcoin economy without banks and other middlemen, the better.
However large this banking crisis will turn out to be, it could be an eye-opener for many people, including those who have previously underestimated Bitcoin. A financial system where you truly own 100 percent of your money and are not dependent on the promises of banks or governments, is clearly superior to a system based on debt, lies and monopolies.
Although the USDC has quickly recovered from its crash, you should think twice if you really want to invest in a so-called “stablecoin” that depends on the sick banking system which can collapse any moment. Only a stablecoin which is 100% backed by Bitcoin is a good stablecoin, especially if it is heavily overcollateralized to compensate for Bitcoin’s volatility. That’s why I rather recommend to have a look at Bitcoin-based stablecoins like the Dollar-on-Chain.
Even if it might still take a while, the end of the fractional reserve system is inevitable. We live in interesting times…
By Aaron Koenig, images by Dall-E.