The ‘iron law’ of bad advice keeps being true (more social media followers = worse advice):
— Elon Musk (@elonmusk) March 11, 2023
So how has Bitcoin fared following the collapse of Silicon Valley Bank (SVB)?
Down 10%. Not just Bitcoin that is tanking, so are many ‘stable coins’ like USDC, which have exposure to SVB. The failure of SVB is probably going to precipitate the failure of crypto, too. Much of the crypto ecosystem depends on stable coins, which have assets that are tied up by SVB. The failure of USDC will lead to cascade effect of others failing too, and then the whole thing will collapse.
Financialization means new, unforeseen risks are constantly showing themselves due to the intricacy of the interconnected system. Failure of stable coins will probably lead to sub $10k Bitcoin for sure. FTX was just $20 billion; stable coins combined are $150 billion. It’s obvious crypto has failed miserably has a hedge, either against inflation or crisis. It’s just another highly speculative risky asset, that is correlated with other risky, speculative assets.
In some ways, the failure of SVB is worse than 2008, for several reasons:
1. Much more sudden. News of SVB’s capital shortfall broke on Thursday, causing the stock to fall 60% (bad but survivable). But by early Friday morning SVB was effectively dissolved (put into FDIC receivership), thanks in part to Peter Thiel and other VCs imploring founders to withdraw their money. [What you think is going to happen? It’s not going to be an orderly exit.] By comparison, the 2008 crisis was years in the making, first with the decline of home prices in 2005-2006, the collapse of the subprime housing market in 2007, and culminating with the failure of Lehman Brothers in Sep. 2008.
2. Much more rippling effects to commerce. The 2008 crisis, as bad as it was, mostly affected banks, homebuilders, and homeowners. It never affected payrolls or day-to-day operations with quite the sudden severity as the collapse of SVB. And not only that, but many more sectors affected too. Pretty much every single company involved in tech now has to give an upstate/status in regard to SVB, like how much exposure, payrolls, etc. 2008 was not like that.
Regulation is always lagging a moving target. SVB was done-in by bad long-term treasury bond bets followed by a run on its assets, not anything to do with real estate or derivative bets, like in 2008. The culprit was inflation, which produced massive losses on those treasury bond positions, whereas in 2007-2008 it was falling home prices.
This is also why I keep recommending the same big tech stocks, like Facebook/META, Google, Microsoft, Tesla, etc. Financial stocks (except payment processing like Visa/Mastercard/PayPal) have too much systemic or hidden risks, or opacity/complexity of the business model. How many people in 2008 could explain what a credit default swap does or how a tranche works, yet everyone knows what an iPhone is, can recognize a Tesla, shops on Amazon, uses Facebook and Instagram, or has a Windows computer. I stick to stuff that makes sense to me, and a lot of ordianry people use. This acts as a sort of vetting process, which means more transparency and less risk of fraud or collapse due to hidden risks.
Bond collapse is a nightmare for so many overcautious or conservative savers.