edit: made a mistake in the title, and had to remake the whole post.

It's a side effect of Fed raising the rates too quickly, along with institutions who faced some Covid crisis vulnerabilities in the last 2 years.

It will have some short term effect on the crypto market, but as we've seen last year, may not necessarily last that long for crypto.

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Why are interest rates becoming a problems for banks?

It's really banks like SVB who ran into problems with Covid that are the first ones to run into this problem.

SVB was facing the issue of recent years of low interest rates, exacerbated by Covid, which makes it tough for banks.

That's how they make money.

They have to look at ways to invest their clients funds. And from lack of better options, they had to look at more long term investments.

And that's where it came back to bite them in the ass.

Feds have increased interest rates way too fast, to try to tackle inflation….which was caused mainly by their money printers, along with the side effects of the Covid crisis.

What happens when interest rates rise too fast?

Short term, it means it increases the rates for everything (loans, bond rates, mortgage rates, etc..}

So that's good news for banks right?

Not for banks like SVB who don't have enough of the short term investments, and are more heavily invested in long term investments.

The rates may have increased short term, like for bons, but long term bonds are lower now. It's called an inverted yield curve. When long term bonds give you a lower yield than short term bonds, when normally it should be the opposite.

Banks like SVB have 2 problems:

They have the shittier rates of return, and they are tied up in long term investments that they are stuck with for years before it reaches maturity. They can off course sell it at any time, but not for what they've put in. Those bonds have lower demand, so they have to sell them at a loss. So to have cash and provide liquidity, they have to lose money.

And that's when they start seeing red.

When people realize those banks may not have enough money, it could start a bank run.

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Silvergate

Silvergate ran into that very same problem. But on top of that, it also had too many people from crypto pulling out their cash from the crypto market.

A big chunk of Silvergate are crypto depositor.

In 2022, there were more people pulling out cash than putting it in, due to the crypto bear market.

And they pulled out by the hundreds of millions.

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How does this affect crypto?

Some of these banks like Silvergate, were heavily tied in crypto, and were banks used for DeFi. And as many of these things typically go, there could be more contagion. It starts affecting everything.

More importantly for us in crypto, its one of the depositors for exchanges like Coinbase and Gemini.

When you bought crypto on Coinbase, one of the bank they used to deposit that money was Silvergate. Same when you cash out.

But JPMorgan, Goldman Sachs, Signature Bank, and others, are still among the banks they still use as their FBO accounts to get those funds and liquidity.

The other issue is the people panicking about USDC. Luckily, USDC is not an alog stablecoin like Luna.

The main issue realy lies ultimately on the banking side.

And you can make the case that this actually further highlights the problems of banking, and the need for blockchain, decentralzation, and crypto.

The big flaws here are exposed in the centralized banking system.

It relies too heavily on trust.

Trusting a bank, and trusting that not too many people will pull their cash at the same time.

Because the hard truth is in the end, banks don't actually have your money.

In crypto, your funds are always gonna be on the blockchain whenever you need them. It's absolute money, with absolute ownership, always absolutely present.

But right now, crypto still heavily tied to centralization and traditional market. The decentralized side of finance isn't big enough yet.

Is this something big and long term for crypto?

It will likely have further short term side affects. But when it comes to the crypto market, I wouldn't bet on long term effect. Coinbase, Gemini, and many other users of these banks, already have alternative. Many of the funds were also FDIC insured FBOs. I know Coinbase's fund should be mostly FDIC insured.

And even USDC which seems to be what's most affected, isn't an algo stablecoin like Luna, and has a better chance at getting repegged, along with more likely having a more solid backing.

And ultimately, we got the advantage of already have seen this play out. We've had a combo of Luna collapsing, one of the main exchanges (FTX) also collapse in its own scam, and other financial companies in crypto like Voyager also tank. And we've seen that despite the apocalyptic and Lehman brothers look alike, the effect remained short term, and crypto managed to bounce right back fairly quickly.

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tl;dr: Explain to me like I'm 5.

-Remember Covid and Fed printers? That caused a lot of inflation, the cost of goods rising.

-Fed in response raised rates to tackle it, but maybe a little too high too quickly.

-Those rates rising, plus the market expecting a recession, caused short term bonds to be worth more, but long term bonds to drop in value.

-Banks like SVB who simply didn't have any better options at the time (mainly because of Covid), were too heavily invested in long term bonds.

-Those banks portfolio lost value, and couldn't give competitive returns, customers pulled out.

-As people pulled out, they had to sell those bonds to be able to pay money to those customers, but at a loss.

-It created a vicious cycle, of lost value, and even more customers wanting to pull out. And eventually a bank run as the bank was failing.

-One of those banks (Silvergate) was one of the money provider for Coinbase, Gemini, and others in crypto. That bank lost value because of the interest rates issues, and because of too many crypto bros pulling out their money during the bear market. It eventually failed. That created a ripple effect of fear on crypto (especially on USDC).

-Some good news: USDC isn't an algo coin like Luna. We've already seen financial companies for crypto collapse last year, while seeing stablecoins completely collapse, along with major exchange collapse, in the same time frame. And crypto was still able to bounce back quickly. Coinbase, Gemini, etc… have already found other banks elsewhere. There could be some potential government bailouts. These banks, and some of those crypto funds like Coinbase's were FDIC insured.