Crypto market cap down over 6% after Silvergate's shutdown

On Thursday, cryptocurrency's total market capitalization plunged by more than six percent from $1 trillion to $942 billion following the news of Silvergate Bank's liquidation.

Bitcoin (BTC) dropped by more than 7.5 percent late Thursday to $20,300, hitting a seven-week low. Oanda senior market analyst Edward Moya added that BTC could experience further pressure to $20,000 due to the "tough" crypto environment.

“This remains a tough environment for crypto. Bitcoin could see further selling pressure test the $20,000 level."

Edward Moya, Senior Market Analyst at Oanda

Ether (ETH), the second-largest coin in market cap after BTC, also plummeted, trading at around $1,439 per token.

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Altcoins also saw significant price pressures. Solana fell by seven percent, Polygon declined by six percent and Avalanche plunged by five percent. Meanwhile, Cardano, Polkadot and Litecoin dropped by around three percent each.

After Silvergate delayed the release of its annual reports and raised concerns about whether the bank could continue operations last week, crypto firms like Coinbase and Paxos quickly withdrew their assets from Silvergate.

Coinbase has assured customers that it is not at immediate risk from the liquidation of Silvergate since the firm already ended business with the bank last week. However, investment research firm CFRA pointed out that "indirect impacts" could affect the exchange's operations.

"Although COIN has more measured exposure directly to SI, indirect impacts around the health of like-kind clients and/or general investor enthusiasm (i.e., trading activity) could also create an overhang on COIN's fundamentals," David Holt, an analyst at CFRA, said.

On Thursday, Coinbase shares fell by 7.8 percent to $58.

Analysts said the liquidation of Silvergate, an important U.S. banking partner for the crypto community, causes uncertainty about investors' and businesses' future ability to trade their crypto assets to dollars and vice versa.

Silvergate operated the Silvergate Exchange Network (SEN) — now suspended — that allowed customers to exchange U.S. dollars between registered accounts at any time of the day to match the liquidity requirements of the crypto market.

Silvergate's shutdown increases concerns that many banks are avoiding digital assets in recent months, as noted by analysts. New York-based commercial bank Signature Bank, known to be a crypto-friendly bank, is currently minimizing its exposure to crypto by reducing its crypto-tied deposits to $10 billion from $18 billion.

Analysts at digital asset data provider Kaiko said small banks should "fill the gap" left by these larger banks, or the crypto community would explore other alternatives, such as the euro and non-dollar-backed stablecoins.

"It's a blow to the ecosystem but its unlikely to be a permanent one."

Noelle Acheson, Former Head of Market Insights at Genesis

Noelle Acheson, former head of market insights at Genesis, said it would not be a "smooth transition" for the crypto industry. However, Acheson added that the uncertainty in dollar access by the crypto community would not be permanent.

The crypto industry was also under additional pressure on Thursday after Silicon Valley Bank (SVB) announced that it would sell its assets and shares to raise capital. SVB has little exposure to crypto but serves crypto-friendly venture companies like Sequoia and Andreessen Horowitz (a16z). Shares of SVB's holding company, SVB Financial, were down 60 percent following the news.

Regulatory pressures on crypto

On its note, Silvergate said regulatory pressures partially contributed to its decision to shut down the firm. Following the infamous collapse of crypto exchange FTX, lawmakers in the U.S. — and other parts of the world — have called for more stringent regulations on crypto.

The Biden Administration proposes to close a tax loophole that can raise $24 billion for the U.S. government. This loophole allows investors to accumulate their losses in crypto investment in order to offset capital gains and income, meaning that these individuals can pay less in taxes.

Officials in various states have also sued crypto firms for alleged unlawful conduct. For example, the Office of the New York Attorney General has sued crypto exchange KuCoin for not registering as a securities and commodities broker.