Like the Madoff scandal in 2008 and the downfall of Lehman Brothers, the FTX collapse created a domino effect that affected the entire sector. Sam Bankman-Fried may be getting his just desserts and is facing criminal prosecution for his crypto scam FTX, but legitimate financial institutions are also facing collateral damage in the wake of the FTX collapse.
Silvergate Pays the Price for Holdings with Crypto Scam FTX
One of these unwitting victims of the FTX crypto scam is Silvergate, a licensed, reputable bank that focuses on cryptocurrency. Silvergate had significant holdings in FTX and Sam Bankman-Fried’s crypto hedge fund, Alameda Research. As FTX unraveled, Silvergate clients began withdrawing their funds in droves to the tune of $8.1 billion, as reported by The Wall Street Journal.
The only way Silvergate could cover these withdrawals, which exceed the bank’s total profits since 2013, was by selling securities and derivatives at a $718 million loss.
In the wake of the FTX collapse and the desperate attempts to cover account withdrawals, shares in Silvergate dropped 45%. The bank has had to delay the release of its proprietary stablecoin.
However, Silvergate emphasizes that it is still afloat and is not abandoning its commitment to cryptocurrency. “While Silvergate is taking decisive action to navigate the current environment, its mission has not changed. Silvergate believes in the digital asset industry,” it said in a statement.
Although it seems Silvergate is likely to weather this rather violent financial storm, the challenges faced by the crypto bank can be a cautionary tale for any company in the crypto industry. Even a licensed fintech company can experience fallout from major crypto scams.
Takeaways from the Silvergate’s Financial Crisis
It can be difficult even for crypto experts to distinguish between a fraudulent and legitimate company. Even Silvergate, a prestigious bank, wasn’t aware of Sam Bankman-Fried’s shenanigans and ended up having to sell valuable assets to stay afloat.
What’s true for companies is also the case for individuals. Like Silvergate, there’s no need to abandon cryptocurrency even though it’s a risky asset. However, the more cryptocurrency we hold, the greater the risk that something may go wrong. Bitcoin prices may collapse or we could unwittingly fall prey to a crypto scam.
It’s estimated that 90% of Silvergate’s deposits are crypto-related. Therefore, it’s not surprising that it would face a crisis at some point, given the fact it’s so strongly levered to a sector that is characterized by volatility and a large number of crypto scams.
What’s the takeaway from Silvergate’s losses? Individual investors should keep in mind that the more risky assets they hold, the greater the likelihood of losses. For instance, bitcoin enthusiast Mark Cuban recommends that for private investors, cryptocurrency should comprise no more than 10% of their portfolio.
Also, Silvergate’s story teaches us that almost anyone can be affected by a crypto scam. Those who want to continue using and trading cryptocurrency should be aware of the signs of crypto scams and to seek the guidance of experts if they’ve lost money to frauds and are seeking crypto recovery.
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