Bitcoin & the Silvergate drama - what does MicroStrategy really have to do with it?

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Microstrategy recently took to Twitter to reassure investors – and the market as a whole – about its “minimal exposure” to Silvergate. Silvergate is a troubled crypto bank that has been the subject of discussion online after news of the late filing of the 10-K report sent shock waves to stocks and the crypto market.

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According to the tweet, the company is telling its 175,000 followers that even if Silvergate goes bankrupt, Microstrategy’s $205 million loan would not be accelerated to meet the bank’s financing needs. The market did not take this lightly, however, with major cryptocurrencies down 5% on the day.

“We have a loan from Silvergate that is not due until Q1 ’25. The market is worried about SI’s financial situation. For anyone wondering, the loan would not be due due to IR’s insolvency or bankruptcy. Our BTC collateral is not held with SI and we have no other financial relationship with SI.”

We have a loan from Silvergate that is not due until R1 ’25. There is mkt concern regarding the SI wing. condition. For anyone wondering, the loan would not accelerate b/c IR insolvency or bankruptcy. Our BTC collateral is not held w/ SI & we have no other financial relationship w/ SI.
— MicroStrategy (@MicroStrategy) March 2, 2023

The Silvergate shook briefly

The whole Silvergate debacle started when FTX, one of the bank’s biggest partners, collapsed, sending Silvergate and the entire crypto market into a tailspin. Since then, the company has been on something of life support, and fourth-quarter earnings metrics have declined significantly.

As a result, the company’s delayed 10-K filing prompted its partners to distance themselves to mitigate potential losses. Industry giants like Coinbase, Circle, Paxos, Galaxy and CBOE have recently issued statements regarding their respective commitments. Circle, the developer of the USDC stablecoin, explains that you can “use certain services with them [Silvergate] Cancel” and “notify customers”.

1/ We maintain relationships with a number of banking partners. We are sensitive to the concerns surrounding Silvergate and are in the process of rolling out certain services and informing customers. Otherwise, all Circle services, including USDC are operating as usual.
— Circle (@circle) March 2, 2023

Source: Silvergate 4Q22 Earnings Report

This has certainly raised concerns about another cataclysmic event for the crypto industry. Some are already calling Silvergate’s likely bankruptcy a “second FTX”.

MicroStrategy: Potential spillover effects

Because the bank has a deficit from a bank run of $8.1 billion last year, the company received $3.6 billion in loans from the Federal Home Loan Banks – a scheme originally designed to help home finances.

Silvergate is basically a regulated bank with full federal protections and is positioned just as a gateway to the crypto market. Given the company’s relationship with traditional finance, it’s safe to say that if Silvergate were to go bankrupt, it would leave a small dent in the financial system.

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Regulatory Response

It also means a stronger regulatory response to crypto companies. Last month, the US Department of Justice announced that it intended to investigate Silvergate’s relationship with the now-defunct FTX exchange.

Silvergate’s fate remains unclear. But: The current situation is reopening wounds that have not yet healed, because the memory of last year’s pain is still fresh in the minds of investors.

How that will affect the future of digital assets is now a matter of speculation.

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Text credit: Bitcoinist