Powell Testimony in US Congress could wash out Silvergate FUD from crypto market

The hearing on the Semiannual Monetary Policy Report to the Congress will feature Federal Reserve chair Jerome Powell, who will be testifying about the state of the United States economy and the central bank’s monetary policy outlook for 2023. The hearing is scheduled to start at 15:00 GMT, and could have a big impact in all financial markets, including cryptocurrencies.

Silvergate FUD is deeper than it appears

Following a relatively bullish two months of 2023, the crypto market is currently exposed to ‘Fear, Uncertainty and Doubt’ (FUD) after the Silvergate Bank crisis that saw the likes of Coinbase, Circle, Paxos, Galaxy Digital and others terminate partnerships with the bank. This long list of lost clients suggests why Silvergate’s current position is terrifying. Consequently, Silvergate’s stock price plummeted by 66% between March 1 and March 3.

The fall from glory comes after revelations of federal investigators probing Silvergate’s involvement in the FTX collapse. Some of the bank’s customers were alarmed by the FTX fall, leading to an $8.1 billion bank run that wiped out 60% of its deposits in a single quarter. Citing the Wall Street Journal:

[The situation was]….worse than that faced by the average bank that closed during the Great Depression."

Based on Silvergate’s quarterly statements, the bank’s Q3 results were a total disaster recording a $1 billion loss. In a March 1 filing, Silvergate revealed an unexpected regulatory document alleging that “the quarterly numbers were actually significantly worse,” casting doubts on whether the bank will be able to continue operating.

Commenting on the matter, Ava Labs president John Wu said:

If Silvergate falls out of business, it will force funds and market makers further offshore. The difficulty of obtaining actual cash money, or liquidity in financial parlance, is the problem. Transactions become more challenging when there is less liquidity.”

Wu’s comments reflect that very few institutions deal with crypto. In fact, besides Silvergate, only one other US bank provides access to banking services that move as fast as cryptocurrency.

Crypto on Jerome Powell’s testimony agenda

Despite the stock market rally on Monday, cryptocurrency prices did not recover. Hodlers of top market capitalization assets like Bitcoin (BTC) and Ethereum (ETH) are skeptical after markets failed to rally following the February 21 peak.

Nevertheless, traders remain alert for Jerome Powell’s hearing before the US Senate Banking, Housing and Urban Affairs Committee. Notably, the crypto ecosystem is among the expected topics for discussion at the hearing due to the numerous scams and frauds that have taken place over the last year. The collapse of TerraLabs set off a chain reaction that led to the subsequent insolvency of major players in the industry, including Three Arrows Capital, FTX, BlockFi and so on. 

Hence, the committee is likely going to bring up the matter of crypto regulation, among other things.

As was the case for all past statements by the Fed president, Tuesday’s hearing has sparked much interest among traders and investors who speculate on increased volatility. After the FTX implosion, experts color-coded the recovery of the cryptocurrency market with a resumed correlation between Bitcoin (BTC) price and the S&P 500 Index.

Notwithstanding, the Silvergate crisis has hugely impacted the crypto playing field, so much that the sentiment has shifted from bullish to neutral.

Based on on-chain data, before the Silvergate-inspired FUD debacle, most traders traded long positions on crypto assets. However, despite such a standing and the latest rally in stock prices, there have been minimal (if any) signs of cryptocurrency price recovery. This is shown by the S&P 500 versus Bitcoin price divergence currently being at the highest since the November collapse of Sam Bankman-Fried’s crypto empire.

Nevertheless, any positive hints from Powell’s hearing could fuel a leap in stock markets and crypto prices in tandem. If not for a direct dovish mention, a minor positive comment like “disinflation” or dissipating the hawkish idea of the interest rate hike pace in the upcoming FOMC Meetings could fuel a rally for risk-off markets. As FUD has already settled in, therefore, Santiment metrics point to increased probabilities of price bounces if the hearing goes well.

Market participants will also look for any notable progress in the case between the US Securities and Exchange Commission (SEC) and Grayscale.