After the crypto focused Silvergate went belly up (the shadows of FTX keeps on giving), today we have Silicon Valley Bank crashing
- The stock is down 60% during trading hours, and another 22% decline in the after hours
In the nutshell, the company needed to raise capital
- It sold off its entire bond portfolio at a loss of $1.8 billion (all of its $21 billion in marketable securities)
- Raised an additional $2.25 billion: $1.25 billion of stocks, $500 million in private placements, and $500 million in convertible preferred shares
- Crystalized losses and shareholder dilution
How did this happen?
- Silicon Valley Bank tried to generate additional yield from the excess deposits it absorbed during the venture capital tech boom in the early days of the pandemic, by investing heavily in bonds
- Then the Fed's quantitative tightening and rapid rake hikes, reduced liquidity and crashed bond value
- At the same time, tech valuations have been crashing, even worse for the start-ups
- And depositors have been pulling out - Silicon Valley Bank experienced a $34 billion net deposit outflow in the second half of 2022, hence the need to raise capital to make up for the outflow
- The VC party is over and you can get better returns elsewhere, why would anyone keep deposits that earn ZERO return?
Why does this matter?
- "Accelerated startup failure"
- Bank run
- Funding drying up for Silicon Valley Bank
- Funding drying up for the start-ups
- Silicon Valley Bank raises another round of capital, further erode equity
- Vicious cycle repeats until you can no longer raise anymore capitals
- Bank fails
- Contagion, or sold off for pennies to another bank(s)
Liquidity situation is only getting worse
- Fed wants a recession, Fed gets a recession, anything short of that, interest rate will continue to go up
- As interest rate go up, asset prices fall, delinquencies go up, funding becomes more and more expensive
The final count down
- Final capitulation is when individuals and companies have to "sell at a loss" to keep the personal and company finances afloat, just to live to see another day. This is a perfect example
- During the good time, investments you thought you could hold until maturity years or decade from now, are no longer possible under the current environment
- Remember the 2008-2009 bloodbath? Domino effect, contagion, one after another, good assets were sold regardless of price
- 50% off sale, became 80% off sale, became 95% sale, became 99% sale, some went bankrupt and got delisted
- Everything fell off the cliff - EVERYTHING - that's when the "circuit breaker" got implemented to allow time for traders to analyze and add liquidity
- It was not until Fed intervention and quantitative easing for the market to stabilize
I am ready for deep deep discounts - the charts will probably look worse, now is still not the time to buy
While many are optimistic that BTC and crypto will go much higher again like clockwork
- Never forget the lesson history taught us: after the dot.com crash, it took NASDAQ 15-years to return to its former all time high
- Fed cutting rates may help market recover, but will Fed ever return the interest rates to almost zero again?
- BRICS countries are also looking to decouple from the USD, with gold-backed currency, this time things are getting real. This may make USD worth less (therefore anything priced in USD may look better)
- Will this be the new currency of choice and as a store of value? (Competition to Bitcoin)
Similar to the NASDAQ index, the high water market right now is $2.9 trillion dollar market cap, when will the market return to the former ATH?
What will get us back there? USD devaluation? Rate cuts? Another "Bitcoin halving"? Or all of the above?
It does not necessarily mean Bitcoin has to return to $69k, nor counting on the top 10 coins to stay the same
Time will tell...