Crypto prices fell Thursday after Silvergate, a bank that has been at the center of the industry's growth, made a decision to shut down.
The slight move lower began late Wednesday, a few hours after Silvergate Capital announced it will wind down operations and liquidate its crypto-friendly bank.
The relatively small size of the move indicates that cryptocurrency investors priced the news in last week when the company first warned it may not be able to continue operating and it shut down the SEN, or Silvergate Exchange Network, according to Conor Ryder, research analyst at Kaiko.
The declines deepened by Thursday afternoon, however, after shares of SVB Financial, whose Silicon Valley Bank, which largely banks tech startups, announced a plan to raise more than $2 billion in capital to help offset losses on bond sales. Although SVB has said it has minimal exposure to crypto, its need to recapitalize on the heels of the Silvergate event has linked the two events in some people's minds.
Bitcoin and ether have held up relatively well despite a challenging macroeconomic environment — still the biggest driver of crypto price action despite a declining correlation between crypto and stocks — and a series of setbacks for the space, including the recent Silvergate developments and the post-FTX regulatory crackdown on the industry that began in February. Even their single-digit drops on Thursday pale in comparison to the 60% and 41% declines suffered by SVB and Silvergate, respectively.
Bitcoin's correlation with stocks is lower than it was for much of 2022 and its volatility has been near historic lows for the past few weeks.
Thursday's move pushed bitcoin below the key technical level of $22,200. While some investors have welcomed bitcoin's recent sideways movement in light of a series of negative industry developments, chart analysts have been looking for the cryptocurrency to close above $25,000 to give more meaning to its year-to-date gains, now around 30%.
A drop in liquidity
The end of Silvergate is concerning for the industry, which now expects a slowdown in inbound flows without the SEN or enough reliable alternatives.
Businesses still have Signature Bank, whose Signet platform is comparable to Silvergate's SEN, but the company has already said it plans to limit its crypto exposure in light of recent events. The industry will be monitoring its developments, however, particularly following last week's coordinated effort by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to warn banks about the liquidity risks that come with banking crypto companies.
"Those warnings make it difficult for the biggest banks to service the crypto space as we believe they have concluded that the opportunity is not worth the regulatory risk," Jaret Seiberg, an analyst at Cowen, said in a note Thursday. "This likely consolidates crypto exposure to a handful of smaller banks, which means more liquidity risk and more concentration risk. Those are the very risks the banking regulators are trying to combat."
If smaller institutions don't step up, the U.S. risks losing significant market share overseas, Kaiko's Ryder said, adding Europe looks especially well positioned to step in thanks to its regulatory clarity in the form of Markets in Crypto-Assets, or MiCA, regulation.
"Our data showed a spike in euro volumes for bitcoin versus the dollar over the last week," he told CNBC Thursday. "We've also noticed a drop in liquidity on both USD crypto pairs and U.S. exchanges as liquidity providers are taking a wait-and-see approach. In the short term, lower liquidity will lead to more volatility in markets and bigger price moves up or down."