Why is bitcoin tanking?Besides SVB and Silvergate’s collapses, here are other reasons

Bitcoin saw its losses deepen on Friday, falling below $20,000 for the first time since January, as investors are worried about contagion spreading from Silicon Valley Bank, which was shut down by regulators and taken over by the Federal Deposit Insurance Corp., days after the crypto-friendly Silvergate Bank said it would wind down operations. 

The largest cryptocurrency BTCUSD, 0.36% plummeted 7.5% on Friday to as low as $17,580 Friday, according to CoinDesk data. Ether ETHUSD, 0.77% tumbled 8% to around $1,401. 

Major U.S. stock indexes also retreated Friday. The Dow Jones Industrial Average DJIA, -1.07% slid 0.4%, the S&P 500 SPX, -1.45% lost 0.6% and the Nasdaq Composite COMP, -1.76% fell 0.8%, according to FactSet data. 

As the 16th largest bank in the U.S. at the end of last year, Silicon Valley Bank is a major lender for venture-backed companies. Its collapse Friday weighed on the entire industry – the KBW Bank Index on Thursday dropped more than 7% for its biggest daily loss since 2020. 

“There is just little reason to buy bitcoin now as the market is saturated with negative developments, not just specifically for the crypto industry, but also for the wider financial market as well,” Yuya Hasegawa, crypto market analyst at Bitbank, wrote in a Friday note. 

Meanwhile, crypto traders are also increasingly worried about regulatory uncertainty in the U.S. Some are concerned that Silvergate’s liquidation will accelerate regulators’ efforts to tighten control over banks’ relationship with crypto companies, some industry participants said. 

In addition, the New York State Attorney General Letitia James on Thursday filed a lawsuit against crypto exchange KuCoin for failing to register as a securities and commodities broker-dealer. James also claimed that ether is a security in the lawsuit, the first time a regulator doing so in court. 

Leveraged derivatives positions are also fueling the decline of bitcoin, according to Vetle Lunde, senior analyst at K33 Research. Crypto traders on Thursday saw the largest liquidation volume of long positions in bitcoin since FTX’s collapse, noted Lunde. 

The crypto market is also “very illiquid” at the moment, said Lunde. Lenders such as Alameda and Genesis collapsed, and many other market makers have since been more conservative. “With Silvergate being shut down, fiat rails are less reliable and market makers are even more conservative. The SVB situation today has likely worsened the situation further,” Lunde said. 

From the technical perspective, if bitcoin closes Friday below ​its support level of $20,300, it could increase downside risk for the crypto to fall towards a low of $15,600 it reached in November 2022, according to Katie Stockton, founder and managing partner at Fairlead Strategies.