This morning I listened to a podcast from Financial Times in which they wrote about how VCs (Venture Capital investors) warned people last week against Silicon Valley Bank. The VCs are there to help people with great advice and they earn a lot of money while doing so. The podcast touched a question that I really found strange, but I kind of understand it at the same time.
Is it bad that the VCs warned their customers/clients against Silicon Valley?
The answer to the question was a no. But they also said that the outcome of such warnings in general to clients is what caused a bank run in which people ran to the bank to withdraw their funds. As the bank didn't have funds ready for such activities, they had to liquidate their holdings, and it all had a bad end.
But once again... are the VCs to blame for this? Could this have been stopped if they had kept quiet?
There are lots of things I don't understand in the world of finance and economy. But what I do know is that the bank industry would be in great trouble if we all decided to withdraw our funds. Why is that? They don't have the money waiting for you. When you deposit money, they set your money to work. A tiny amount is available at all times, but only a small part of all deposits. That is why banks get in trouble during bank runs as they do not have the money available for all deposits.
If you set it into perspective, what they expect from crypto companies is way tougher. When we speak of proof of reserves, they actually expect exchanges to prove that they have all deposits and funds available at all times. In other words, if an "exchange-run" should happen, they should actually be able to cover, meaning that all funds are secure at all times.
The thing is, I don't blame the VCs for warning their clients. It is their job. If they see danger, they should tell their clients. Honestly, that is their job! The problem, the way I see it, is the banks themselves, as they are living risky lives and always living on the mercy of the depositors. The entire concept is wrong...
If something is good and real, then it should be able to handle bad publicity and VCs telling their clients to move funds. It might cause trouble, but in an ideal world, it shouldn't cause something to collapse.
What do you think?