Bank Runs in the Crypto Age: How Silvergate’s Collapse Illustrates Modern Liquidity Risk

A bank run can be triggered by events outside the bank if its deposit base is concentrated in a single volatile sector.

Silvergate lost $9 billion in deposits not because clients doubted Silvergate, but because crypto exchanges lost customer confidence after FTX’s collapse.

Why: When an entire sector faces redemption pressure, the bank becomes the backstop and must fund mass withdrawals even if its own creditworthiness is intact.

"Silvergate was faced with a good old-fashioned bank run, driven not by a loss of faith in Silvergate, but by a loss of faith in the crypto exchanges."

Rising rates can destroy capital twice: by marking down bond portfolios and by evaporating deposits tied to speculative booms.

Silvergate’s $11.4 billion bond book lost ~$750 million when sold; simultaneously higher rates cooled crypto speculation, shrinking deposits.

Why: Speculative inflows are negatively correlated with real yields; when rates rise, the deposits that arrived during the boom leave, forcing asset sales at losses.

"Matt Levine at Bloomberg argues that one way to think about the rise and fall of Silvergate is that the crypto boom was at its heart a low interest rate phenomenon."

A single quarter’s realized losses can push a well-capitalized bank below regulatory thresholds if capital is thin and assets are marked to market.

After $1 billion in Q4 losses, an incremental $19 million loss would have dropped Silvergate’s capital below 5%, triggering ‘not well capitalised’ status.

Why: Risk-weighted capital rules magnify the impact of losses on high-quality securities because their low risk weights leave little buffer.

"an additional $19 million loss would push their capital below 5% and they would no longer be considered well capitalized."

Serving a single industry magnifies both operational and reputational risk because regulatory and market shocks hit every client simultaneously.

Silvergate’s deposits were almost entirely from crypto firms; when the sector imploded, every major client demanded cash at once.

Why: Diversification across sectors smooths withdrawal timing; concentration creates correlated liquidity demands.

"it can be argued that its exposure to crypto was its lack of diversification."

Criminal investigations into key clients can accelerate deposit flight even if the bank itself has not been charged.

DOJ’s probe of FTX extended to Silvergate’s accounts; senators publicly questioned the bank’s due diligence, spurring additional withdrawals.

Why: Uncertainty about future fines or sanctions raises the cost of keeping deposits at the bank.

"Silvergate collapsed amid a criminal investigation by the Justice Department's Fraud Division, along with scrutiny from politicians and regulators."

Non-interest-bearing deposits are the cheapest funding, but they are also the most flight-prone in a crisis.

Silvergate paid 0% on $13.2 billion of crypto deposits, funding long bonds; when those deposits fled, the bank had to borrow $4.3 billion from the FHLB at higher cost.

Why: Sticky retail deposits are insured and relationship-based; commercial deposits tied to trading flows exit at the speed of a wire transfer.

"the beauty of dealing with these crypto customers... you don't really have to pay them any interest on their deposits."

Funding short-term, volatile deposits with long-duration securities creates duration risk that must be actively hedged.

Silvergate invested deposits in Treasuries and MBS with multi-year durations; when deposits left, forced sales crystallized mark-to-market losses.

Why: Without hedging, rising rates lower bond prices exactly when liquidity is needed, compounding losses.

"Sheila Baer... told Bloomberg... Silvergate's troubles are as much, if not more, about traditional banking risks, lack of diversification, maturity, mismatches and so on."

When traditional banks refuse a sector, specialized banks gain monopoly pricing power but also inherit all of the sector’s systemic risk.

Because mainstream banks shunned crypto clients, Silvergate became the sole USD gateway, earning fat spreads but bearing the full brunt of sector volatility.

Why: Barriers to entry for competitors mean the lone willing bank absorbs outsized risk relative to its capital base.

"there was significant demand for a crypto-friendly bank and Silvergate was willing to fill that role when no other bank was willing to take that risk."