Silicon Valley Bank Crisis Is Bitcoin’s ‘Cyprus Moment’: Crypto Observers

Cryptocurrency observers say the collapse of Silicon Valley Bank (SVB) is a good thing for Bitcoin (BTC), drawing parallels to the 2013 Crypus crisis, which highlighted the flaws in fractional reserve banking and caused The focus on decentralized, censorship-resistant BTC as a hedge against central banks.

“Silicon Valley Bank, America’s 18th largest bank, collapsed yesterday – and through it we learn how last year’s record sell-off in U.S. Treasuries caused billions of dollars worth of unrealized losses in the banking industry and get another example, in the section In a reserve banking system, there are no depositors, only lenders,” said researcher Nik Bhatia and market analyst Joe Consorti in the latest issue of The Bitcoin Layer newsletter.

Bhatia and Consorti added: “Fed’s aggressive pumping and shrinking balance sheet led to historic bank failures — creating real-time advertising for Bitcoin self-custody.”

SVB’s crisis began early last week after the start-up-focused bank sold a portfolio of mostly U.S. Treasuries, or government bonds, at a loss and announced a stock sale to shore up its balance sheet. U.S. Treasury prices have fallen sharply over the past year as the Federal Reserve (Fed) has aggressively raised prices to keep inflation in check. (Bond prices and yields move in opposite directions).

As SVB depositors scrambled to withdraw their funds, an old-fashioned bank run ensued, with deposit calls totaling $42 billion on Wednesday – nearly 25% of the total deposit base of $173 billion.

Bank runs happen because fractional-reserve banks require lenders to keep only a small portion of their deposits available for withdrawal, while lending out the rest to fuel economic activity. The system assumes that at any given point, the demand for withdrawals will never exceed the pain threshold. However, that assumption evaporates when customer confidence falls, as in the case of SVB, leading to a surge in withdrawals and a shortage of liquidity at the bank.

Regulators typically step in after a bank run, seizure or seizure of deposits. The solution to the 2013 Cyprus banking crisis actually involved regulators raiding customer accounts. Germany paid about $13 billion in exchange for Cyprus’ one-off tax on bank deposits to raise an additional $7.5 billion to complete the bailout of the banking sector.

In the case of SVB, US regulators reined in deposits and closed the bank on Friday. Over the weekend, the Biden administration announced that all SVB depositors will have access to their funds starting Monday. The announcement came as another New York-based bank, Signature Bank (SBNY), also collapsed, in a sign of the fast-spreading panic in the banking sector.

While the measures taken to resolve the SVB crisis have not been as drastic as those for Cyprus, the whole incident underscores the point that customers’ funds are not as safe in regulated banks as we are led to believe. This affirms Bitcoin’s appeal as a decentralized peer-to-peer network and seizure-resistant encryption, facilitating self-custody of funds.

Mike Fay, author of Blockchain Reaction, said in his latest article on Seeking Alpha: “Not your keys, not your tokens, and this is a lesson that obviously must be learned again and again, as history will find a way to repeat itself.” Lessons learned from the SVB and Silvergate Capital debacles and the 2013 Cyprus banking crisis.

“In the western world it’s easy to get comfortable with the perception of a safe and regulated banking institution and not understand why anyone would be forced to buy assets that live outside of that world. But history shows that banks are capable of making bad collateral or wrong staking decisions,” Fay added.

Bitcoin Soars During Cyprus Crisis

With the outbreak of the Cyprus banking crisis in March 2013, Bitcoin rose sharply. The cryptocurrency soared 178 percent to $93 that month and hit an all-time high of $265 in May 2013. At the time, there were reports of euro and Russian ruble holders diversifying into bitcoin after seeing banks in Cyprus collapse.

“Ten years ago this week, there was a bank run in Cyprus, with ATMs emptied and vaults emptied. The event sparked the biggest rally (in percentage terms) in BTC’s history, from $45 in a month to $260,” crypto trading giant Cumberland tweeted early Monday.

Coincidentally, Bitcoin has risen more than 15 percent since Friday, from a two-month low of nearly $19,500 to $22,500, according to CoinDesk data.

“When traders are unsure about crypto prices, they flee to stablecoins and bank deposits. When they are unsure about stablecoins and bank deposits? Now is the time for crypto to shine, BTC and ETH amid uncertainty Banks were up 14% and 15% over the weekend,” Cumberland said.

“History doesn’t always repeat itself, but it often does,” Cumberland added.

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