Let’s talk about the giant elephant in the room, namely that of Silicon Valley Bank. One of the single largest banks runs in American history that is being felt across all sectors, in almost every asset class… except, maybe, crypto.
In fact, things haven’t been this good for Bitcoin and Ethereum in some time, as the price of both surged this week, largely in response to the failure of Silicon Valley Bank. As investors rush to pull their cash from large regional banks into asset classes that are less likely to experience a bank run in the near future.
Let’s start with some of the basics so we can digest and properly dissect the colossal mess that is the ‘Fall of Silicon Valley Bank.’
SVB was founded in 1983 and was the 16th largest U.S. bank before its collapse. They specialized in financing and banking for venture capital-backed startup companies— mostly technology companies. Venture capital firms did a lot of business there, as well as several tech executives like some of your H O D L N favorites from billionaire Marc Cuban.
Why was SVB Important to the Tech Sector?
SVB financed about half of all U.S. venture-backed technology and healthcare companies. SVB was the preferred bank for the tech sector because it supported startup companies that not all banks would accept due to higher risks, like so many tech entrepreneurs.
The pandemic in 2020 was a hot market for tech companies as consumers spent big money on digital services and electronics. Tech companies had a large influx of cash, and SVB’s services were needed during this time to hold their money for business expenses, such as payroll.
The bank invested much of these deposits as banks typically do…
Why did the central tech bank come to a screeching halt?
The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank’s solvency.
Many of SVB’s depositors were startup companies. They deposited large amounts of cash from investors because the tech industry was in high demand during the pandemic.
What about the Lack of Diversification?
Silicon Valley Bank invested a large number of bank deposits in long-term U.S. treasuries and agency mortgage-backed securities. However, bonds and treasury values fall when interest rates increase.
When the Federal Reserve hiked interest rates in 2022 to combat inflation, SVB’s bond portfolio started to drop. SVB would have recovered its capital if it had held those bonds until their maturity date.
Silicon Valley Bank used to lend out money for short durations. However, in 2021, they shifted to long-term securities such as treasuries for more yield, and they did not protect their liabilities with short-term investments for quick liquidations.
“SVB’s deposit growth since 2020 has been impressive. The tech boom of 2020-21 meant that many of its tech customers were raising lots of money from venture capitalists and private equity investors and depositing this money with SVB. As a result, its deposits grew from $65 billion in 2019 to $189 billion in 2021.”
Lack of Cash was the Downfall of Silicon Valley
When economic factors hit the tech sector, many bank customers withdrew money as venture capital started drying up. SVB didn’t have the cash on hand to liquidate these deposits because they were tied up in long-term investments. They started selling their bonds at a significant loss, which caused distress to customers and investors.
And well, you get the idea. From there, the bank run was inevitable and would continue until the federal government stepped in, leaving us where we are now… Thanking the guy upstairs for Bitcoin.