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Fears of a banking system contagion hit crypto markets

Bitcoin and Ethereum prices dropped ~10% in 24h as the fears of a banking system contagion.

March 10, 2023 - Bitcoin and Ethereum prices dropped ~10% in 24h as the fears of a banking system contagion from Silvergate Bank’s liquidation amounted. Although not related to crypto, the Silicon Valley Bank (SVB) stock collapsed after launching a US$1.75bn share sale to shore up its balance sheet. The billionaire Bill Ackman even suggested that the US government should bailout SVB due to its importance to VC-backed companies, which held loans and operating cash with the bank. We think it is still early to point out that there is a contagion in the financial markets, but the SVB issue does not seem good. The Bitcoin price reached a technical resistance in which the Market Value Realized Value (MVRV) ratio of short term investors is close to 1, indicating that there could be an exhaustion of selling pressure from profit-taking related to the latest rally. On top of that, the market seems to have already priced in a 50 bps rate hike in the next Fed decision on March 22, thus, the sell-off could cool down soon.

In another wave of crypto crackdown from US authorities, the Attorney General of New York State, Letitia James, has filed a lawsuit against the exchange KuCoin for allegedly operating as an unregistered securities and commodities broker-dealer in the state. Moreover, the lawsuit classifies Ethereum as a security, despite the recent comments from the CFTC chairman saying that the agency strongly believes that ETH is a commodity, justifying the launching of its futures products. In our view, the regulatory uncertainty among US authorities regarding the crypto industry will continue until the congress approves a legal framework for this market.

In light of the recent events, and US regulators’ diverging approach to crypto, a major overhaul for the sector could happen soon. The House of Representatives Financial Services Committee intends to tackle regulatory issues regarding crypto in the coming months, with several pro-industry proposals. Meanwhile, the US President Joe Biden released his official 2024 budget plan, including proposals subjecting crypto to the same wash sale rules as stocks and bonds, while also raising capital gains taxes. All in all, the attack on crypto by authorities will be relentless, but it also reveals the importance of the industry.

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