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The crypto hedge fund space has endured a series of knocks in the past twelve months. The collapse of Three Arrows Capital and the Luna coin in spring 2022, and the FTX debacle in the autumn, each provided ammunition for those who take a decidedly negative view of the broader digital asset investment spectrum.
The latest challenge for disciples of the space to have to sell against relates, of course, to the failures of banks Silvergate, Signature, and Silicon Valley.
There are similarities between these failures, in that they were all specific to the company in question, and there was a broader impact on the crypto and crypto hedge fund market. But there’s something that concerns me this time, which is the potential for the perception that the SVB disaster could somehow be blamed on the crypto market.
Silvergate’s troubles occurred over a long period of time. The firm laid off more than a third of its workforce in January. There was already a probe underway from the Department of Justice due to the fallout from the FTX situation. But Signature Bank was almost entirely contagion from SVB. The fundamentals were solid, and there was no real reason for a run on it.
That’s the frustrating part; where Signature Bank is concerned, Crypto has become an unnecessary and unfair whipping boy through no fault of its own.
Crypto of course struggled in the aftermath, with most cryptocurrencies falling off, and wider concerns amongst stablecoins specifically, as investors worried about Circle Internet Financial’s stablecoin USDC losing its dollar peg (because of its exposure to SVB).
But cryptocurrencies have rallied, no doubt buoyed by the commitment of regulators to ensure that deposits at SVB and Signature are guaranteed (no such luck with the equity and debt holders, of course). Indeed, Bitcoin nearly recovered to its 2023 high (at the time of publishing), which will encourage the crypto hedge fund space at large enormously. And there’s another positive for the industry, which is that in the UK, for example, the takeover of SVB’s business in the country by banking giant HSBC could be perceived as a signal of support for the digital asset ecosystem.
Others will want to wait to see what HSBC say about the acquisition and their plans for SVB’s existing customers. And there will be those who latch onto the events of last week to support their view that the digital assets sector is too risky (plenty will be significantly more vociferous in communicating their disdain). It’s yet another storm for the crypto and digital asset space to weather. One has to wonder, ‘whatever’s next?’
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
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