March 24, 2023
Greg Cipolaro

Research Weekly - Following the Money


  • We look at the statistics around bank deposits and stablecoins to make some educated guesses as to where money has flowed.
  • Our analysis shows that since 3Q22, $16.3B has flowed into bitcoin, significantly outpacing flows into the rest of the crypto ecosystem at $7.1B.
  • Given the current environment of a banking crisis, it should be no surprise that investors currently favor bitcoin over other digital assets.
  • Banks are still open for crypto business as our analysis shows that $23.3B from Signature and Silvergate likely found their way into deposits at other banks.

Following the Trail of Money

News this week came that Flagstar Bank, a subsidiary of New York Community Bancorp, would be taking over the assets, deposits, and operations of the now-shuttered Signature Bank, one of the banks that heavily banked the crypto industry. Conspicuously, the announcement of the Flagstar takeover indicated that the $4B worth of deposits from crypto companies at Signature would not be part of the deal those deposits would be left behind in the hands of the FDIC receiver. This furthered the narrative of an ongoing coordinated de-banking of the crypto industry and left that $4B of deposits in search of a new home.  While there have been media reports of crypto companies able to establish new relationships with banking partners, we wanted to examine the impact and flow of the money in the digital asset ecosystem.

Silvergate and Signature Show $31.7B Decline in Crypto Deposits

2023 has been a tumultuous year for two stalwarts of the crypto banking landscape, Silvergate Bank and Signature Bank. Both had heavily banked the digital asset industry and their real-time settlements platforms, Silvergate Exchange Network (SEN) and Signet had been the linchpins for the real-time settlement of cash for the 24/7 trading of digital assets.

Some important context is needed here. Stable banking relationships have historically been difficult for digital asset companies to obtain and Silvergate in particular was at the forefront of the movement to bank digital asset companies during the 2017 - 2018 timeframe. Before the widespread prevalence of banking services, digital asset companies such as exchanges, and especially those overseas, relied heavily on stablecoins for the movement of money and as the quote currency of choice for trading. This gave rise to Tether in 2016 - 2017, which handled the interchange of funds between cash and the digital asset ecosystem. Before the rise of Tether, exchanges that didn’t have banking relationships relied heavily on bitcoin as the quote currency for trading and as a means to move money.

The past 4-5 years have been a different era, with banking relationships becoming increasingly easier to obtain for digital asset companies, but still concentrated in a handful of banks. Stablecoins rose in tandem with banking access, including the need for stablecoins with greater proof-of-reserve clarity, such as USD Coin (USDC) which launched in 2018, while Silvergate and Signature rose to prominence as two of the financial institutions publicly willing to bank digital asset clients. For Silvergate, digital asset companies comprised most of their deposits (90% in 3Q22), and for Signature, it was significant, but not as large (23% in 3Q22). Between the two banks, as of 3Q22, just before the FTX turmoil erupted in the market, Silvergate and Signature had roughly $35.7B in deposits from digital asset clients (including FTX and Alameda).

Weekly 1-Mar-24-2023-05-57-55-9692-PM

Today, however, those balances are down to just $4B, a decline of $31.7B in a quarter and a half. This is based on the FDIC disclosure of the Flagstar acquisition and our assumption that all the digital asset deposits at Silvergate, which is currently in wind-down mode, are at zero. Some of those deposits likely made their way to other banks. Even though Silvergate and Signature have been the most vocal attractors of digital asset deposits, they are far from the only ones. Many digital asset service providers, including NYDIG, maintain numerous banking relationships, making the transition to another bank relatively seamless. However, given the media reports of service disruptions across the industry, not every digital asset company had alternative banking options. These digital asset companies may have moved balances into dollar proxies, like stablecoins. But as the following analysis shows, that cannot be the entire story.

Stablecoins Also Show Outflows to the Tune of $15B

For digital asset companies unable to find a banking partner outside of Silvergate or Signature, stablecoins offer a dollar proxy option. The way this works is that the digital asset company could execute a transaction over the counter, buying USDC with USD, that is settled with cash moving from a bank account at Signature or Silvergate. Or they could send it directly to the creation entity, like Circle. The digital asset company then holds USDC in self-custody or with a third-party custodian (NYDIG does not trade or custody stablecoins). While some digital asset companies undoubtedly chose this route, unfortunately, the data does not support this as an industrywide trend, as stablecoin supply is also down significantly since the end of 3Q22.

Stablecoins themselves have been far from the safe havens investors once thought them to be. Prices have been volatile, they have been under increasing regulatory scrutiny, and market share has shifted dramatically. One of the major share gainers over the past year, the Paxos-issued Binance USD (BUSD) digital asset, is presently in wind-down mode after a host of issues emerged. USDC, the second largest stablecoin, recently fell below $0.90 after having 8% of its backing assets tied up in Silicon Valley Bank. On the rise has been Tether, which traded at a premium to par during the recent market volatility, and TrueUSD, which recently got significant deposits from Binance. The net effect of these share shifts still amounts to a $15.0B decline in total off-chain reserve style (dollar-backed) stablecoins and therefore does not account for the dollar flows out of Silvergate and Signature.

Weekly 2-Mar-24-2023-05-59-02-0156-PM

Putting Together Bank and Stablecoin Flows

When we combine the two observations, the decline in identifiable cash balances at banks and the declining supply of stablecoins, two conclusions arise. Either the money went into other banks that have not been identified, or it went into other volatile (well, more volatile than stablecoins) digital assets, such as bitcoin. By examining changes in the total valuations, or market caps, of bitcoin and the rest of the digital asset industry, we can get a better sense of where at least some of that money went.

Weekly 3-Mar-24-2023-06-00-08-1804-PM

$16.3B Flowed into Bitcoin

Measuring the changes in market caps is easy enough. We make the assumption that crypto markets are perfectly rational (a big assumption, we know) and that the new supply of coins by protocol emissions (bitcoin’s every 10-minute block subsidy of 6.25 BTCs for example) does not change the market cap. Only the flow of capital into or out of a digital asset, by buying or selling on a secondary market, changes the market cap. This brings us to our second assumption, that bitcoin and the rest of crypto have a 10.0x money multiplier. This means that for every $1 in or out of bitcoin or other digital assets, the market cap moves up or down by 10x that amount. Where does that number come from? An 11.37x multiplier was measured by CoVenture for bitcoin several years ago. We used a similar number but rounded it down for simplicity’s sake, and the likelihood the money multiplier has declined as bitcoin has gotten larger.

Putting together the change in market caps, we find that $16.3B flowed into bitcoin since 3Q22, while $7.1B flowed into the rest of the digital asset landscape. Furthermore, another $23.4B of bank deposits from Silvergate and Signature likely found their way into other banks, implying banks are still open for digital asset client business. We attribute the significant difference in flow into bitcoin versus other digital assets due to the current environment we find ourselves in—one in which trust in the banking system is low—which is the exact environment for which bitcoin was built. In addition, the regulatory outlook in the US for digital assets outside of bitcoin is increasingly uncertain.

Weekly 4-Mar-24-2023-06-02-59-6533-PM

Concluding Remarks

The foundation of the traditional financial system is trust, and fractional banking in particular requires almost as much faith as trust.  In their own way, stablecoins require a degree of trust in the handling of reserves backing the stablecoins. Bitcoin, however, was designed to remove the need for trust in financial institutions and, given the current banking crisis we find ourselves in, our analysis shows that investors recognize this benefit by voting with their wallets. Our analysis also shows that while banking relationships have become increasingly difficult to come by for the digital asset industry, some companies are still able to maintain banking relationships and move significant amounts of capital to those banks. Bitcoin has boomed throughout the crisis and, given what we know about past banking crises, this one is likely to take some time to resolve. The root issues of unrealized losses on banks’ balance sheets caused by the rising rate environment, coupled with concentrated and flighty deposits, have yet to be resolved. As a result, bitcoin is likely to be an important investment choice for some, especially for those wishing to eliminate their exposure to a banking system at the whim of central bankers, bank regulators, and politicians.

Market Update

Weekly 5-Mar-24-2023-01-23-38-8927-PM

Bitcoin screamed higher again this week, up 13.6% to break the $28,000 level. There was a bit of volatility around the FOMC interest announcement on Wednesday as bitcoin did not interpret favorably the comments about forward rate increases. Prices rallied back, however, as it appears less than likely that the current banking crisis episode will continue without resolution. Equities were mixed on the week, with the financial sector weighing on the S&P 500, which was down 0.3%, but the tech-heavy Nasdaq Composite was up 0.6%. Gold, the traditional safe haven asset, also had a good week this week, up 3.8%. Both gold and bitcoin are having a good year so far, but bitcoin is far outpacing gold, +71.7% vs +9.3% on a year-to-date basis. Oil was up 2.4% on the week while bonds were mixed. Investment grade corporate bonds were up 1.6%, high yield bonds were down 0.1%, and long-term US Treasuries were up 1.1%.

Important News This Week


Bernstein: Cryptocurrency Market Set for More Upside After Bank Problems - CoinDesk

Prof Jeremy Siegel Highlights Bitcoin’s Moment During Current Banking Crisis - Wisdom Tree

Regulation and Taxation:

Flagstar Bank to Assume Deposits of Signature, Excluding Crypto Deposits - FDIC

Coordinated Central Bank Action to Enhance the Provision of U.S. Dollar Liquidity - Federal Reserve

Federal Reserve Announces July Launch for the FedNow Service - Federal Reserve

Economic Report of the President is Highly Critical of Crypto - White House

Coinbase Submits Petition for Rulemaking on Staking - Coinbase

Coinbase's Wells Notice - Coinbase

We Asked the SEC for Reasonable Crypto Rules for Americans. We got Legal Threats Instead. - Coinbase

SEC Charges Crypto Entrepreneur Justin Sun and his Companies for Fraud and Other Securities Law Violations - SEC

Defi Exchange Sushi Receives SEC Subpoena - Sushi

NYDFS Penalizes BitPay $1 Million For BSA/AML/Cybersecurity Violations - The Blog About the NYDFS

Do Kwon Charged With Fraud by US Prosecutors in New York - Bloomberg

Do Kwon Indictment - CoinDesk

Crypto is Banned in China, but Binance Employees and Support Volunteers Tell People How to Bypass the Ban - CNBC


Xapo Bank Becomes the First Fully Licensed Bank To Enable USDC Deposits and Withdrawals - Xapo Bank

eToro Cancels SPAC, Raises Capital, Reports FY22 Results - eToro

Upcoming Events

Mar 31 - CME expiry

This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).

It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report.

The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accessing this report, the recipient acknowledges its understanding and acceptance of the foregoing terms.


Bitcoin for All.
Insights for You.

Subscribe now to learn what’s driving bitcoin markets, track significant regulatory developments, and get the data that deserves your attention.