Crypto markets retraced a large chunk of its yearly gains with a combination of banking issues and macro headwinds leading selling activity.
This week we analyze the news leading the price action, diving into Silvergate’s liquidation and its potential second order effects. We also evaluate the validity of the increasing hopes for a Bitcoin ETF and the current state of the market.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees reached their second highest weekly total in 2023, with Bored Ape’s parent company Yuga Labs’ NFT mint on Bitcoin raising $16.5M
- Ethereum fees remain high, with Uniswap and Blur leading the way in terms of ETH being burnt
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- Over $250M worth of Bitcoin and Ether left centralized exchanges, making it the largest weekly net amount so far in 2023
Analyzing the Impact of Silvergate’s Demise
Just as the crypto space thought it was done with the collapse of major organizations, Silvergate announced it will be unwinding its operations. The bank, which was once worth over $5B is down 98% to a valuation of just $90M.
Losing a Major Crypto Banking Player — Though Silvergate may not be a household name, Silvergate played a key role supporting operations of crypto companies
- The Silvergate Exchange Network (SEN), which handled on- and off-ramps to exchanges among other things, processed over $1 trillion in transactions since inception
- Companies such as Coinbase, Circle, Crypto.com, Galaxy Digital, Kraken and Gemini used the crypto-bank for operations
How Did it Happen? Silvergate’s demise mimics some of the issues seen with DCG’s Genesis bankruptcy and Silicon Valley Bank’s recent crash
- Silvergate had a mismatch between its assets and liabilities: It had purchased a large amount of long-dated treasury bonds to back assets held by its clients
- Unfortunately (or unwisely), these bonds were acquired back when interest rates were just 1%-2%, and as interest rates climbed their price crashed
- Following FTX’s collapse, Silvergate had large capital outflows and it is believed to have been forced to sell the bonds it acquired at a loss
- On March 2nd, Silvergate announced it would be delaying its annual report after receiving notices from bank regulators
- This announcement spread fear throughout the market and led to most of the aforementioned clients it had dropping them (and likely withdrawing their assets) within hours
- On March 8, Silvergate announced it would be liquidating its assets and wind down operations
This collapse is not something unique to crypto, with Silicon Valley Bank going through a very similar situation this week. Regardless, Silvergate’s downfall could hinder crypto’s recovery and make it more difficult for institutions to access the space as many of the largest exchanges relied on SEN to onboard capital into the exchange. This, along with the heightened regulatory scrutiny, may make crypto more of a retail phenomenon again.
Growing & Poised to Accelerate — Addresses holding relatively small amounts of Bitcoin have been increasing their holdings faster than whales
- Addresses holding between 0.1 and 1 BTC ($2k — $20k) have been the fastest growing segment over the past 30 days
- Addresses holding between 0.0001 and 100 BTC currently hold over 40% of all Bitcoin supply — the highest it has been since 2011
- With institutional inflows becoming more difficult without Silvergate, this trend could accelerate over the coming months
Markets Crash — Where Do We Go Next?
Silvergate’s situation has revived fears of contagion in crypto. Between this and traditional markets dropping, crypto saw its largest weekly decline so far in 2023. This uncertainty brings to question of whether this year’s rally is over or not.
$19k Support — A high concentration of buyers has previously bought Bitcoin just below $20k
- Through IntoTheBlock’s In/Out of the Money we see that 474k BTC (~$9.5B) was previously acquired near the $19,000 level
- This is the most concentrated buying zone, suggesting that historically buyers have stepped up when prices are just below the $20,000 psychological barrier
- Below this, the next zone of concentrated buying activity would be at $17k
Near-term Catalysts — In terms of events driving price action, Grayscale’s hearing to turn GBTC into an ETF has been providing some positivity within all the chaos
- GBTC’s discount narrowed from 50% to 35% following judge skepticism towards the SEC’s arguments against its ETF application
- This has increased hopes for an ETF, though it still seems far from certain
- Within the rest of crypto, Ethereum’s upcoming Shanghai upgrade, scheduled for April, could also affect the trajectory of the market near-term
Overall, it appears that uncertainty has returned to markets after a perhaps overly optimistic beginning to 2023. With Silvergate’s collapse and heightened regulatory scrutiny, market participants may be shifting towards a seemingly uninterested retail crowd for the foreseeable future.
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