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The downfall of Silvergate Cryptobank

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It is reported that Bloomberg analyzed the reasons for the closure of Silvergate, a cryptobank, in its latest report, including lack of diversification, term m…

The downfall of Silvergate Cryptobank

It is reported that Bloomberg analyzed the reasons for the closure of Silvergate, a cryptobank, in its latest report, including lack of diversification, term mismatch and high exposure to cryptocurrencies. Due to the uniqueness of Silvergate’s balance sheet, Silvergate does not pay interest for its cryptocurrency customers’ deposits, so it is equivalent to having a “free fund pool” to invest in government debt and similar current assets. However, the Federal Reserve’s constant interest rate increase led to the collapse of Silvergate’s securities portfolio, and the bank customer run led to Silvergate having to sell these securities at a low price, thus accelerating the collapse.

Bloomberg: The Federal Reserve’s interest rate increase accelerated the collapse of Silvergate

Analysis based on this information:


Cryptobanks are a relatively new concept in the world of finance, and much like any new technology, they come with their own set of risks and uncertainties. Silvergate, a prominent cryptobank, recently closed down, and Bloomberg’s latest report analyzes the reasons behind its downfall. The report highlights lack of diversification, term mismatch, and high exposure to cryptocurrencies as the major contributors to the bank’s collapse.

Silvergate’s unique balance sheet worked against it. The bank did not pay interest for its cryptocurrency customers’ deposits, and this implied that it had a “free fund pool” to invest in government debt and similar assets. In theory, this seemed like a good idea as the bank could use these funds to generate revenue. However, it had the opposite effect as the Federal Reserve kept increasing interest rates. This led to a collapse of Silvergate’s securities portfolio, which then accelerated the bank’s downfall.

As more customers started withdrawing their funds, Silvergate experienced a term mismatch, meaning that the bank had to sell itself short by selling securities at a low price to meet its immediate obligations. This further accelerated the bank’s collapse as it was not able to keep up with its customers’ demands.

The lack of diversification in Silvergate’s portfolio also played a significant role in the bank’s collapse. As the bank had a high exposure to cryptocurrencies, it limited its ability to diversify its portfolio into other assets that could have helped balance out the risk. As cryptocurrency values fell, Silvergate’s vulnerability increased, and this ultimately led to its downfall.

In conclusion, Bloomberg’s report provides valuable insight into the factors behind the collapse of Silvergate Cryptobank. The bank’s lack of diversification, term mismatch, and high exposure to cryptocurrencies all contributed to its demise. The report serves as a cautionary tale for the emerging cryptobank industry and highlights the importance of avoiding the mistakes made by Silvergate.

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