The collapse of the Silicon Valley Bank (SVB) wreaked havoc globally, raising questions about the stability of banks and future investment prospects.
Naturally, questions and uncertainty regarding investing in the banking sector have already started haunting global investors, with several of them drawing back their deposits from the banking sector.
However, does that increase the scope of crypto investments, helping digital currencies to pull through the recent bearish market?
Does the SVB collapse signify greater opportunity for such investments? Here are some insights.
It is imperative to map out the difference between decentralized and traditional finance to understand their pros and cons.
Cryptocurrencies are digital currencies that act as a store of value or be used to exchange goods and services.
Crypto transactions fall under DeFi, which implies transactions with little or no human intervention. Naturally, crypto transactions are advanced and highly decentralized.
Banks, on the other hand, are traditional financial institutions offering various services to individuals, including savings, loans, etc.
They are the largest financial institutions in the world and are monitored and governed by a central authority.
Evidently, banks are characteristic of human intervention, which paves the way for room for several obstructions and errors. In short, crypto and banks have their own pros and cons.
However, weighing them became increasingly crucial in recent times after SVB's collapse.
In fact, such a comparison has been a topic of debate amongst most investors looking for a suitable and sustainable investment option.
Can DeFi replace traditional finance? Let's run through this.
Though banks are the oldest financial institutions offering savings, deposit, and loan services, they have stipulated hours of operation.
Thus, individuals must avail of their services only within their operational hours.
However, DeFi, as a result of minimizing human intervention, has no stipulated operational hours. Individuals can carry out crypto transactions and buy or exchange other digital currencies at their convenience.
Such a feature has increased the popularity of crypto investments.
As mentioned earlier, crypto uses advanced technology that acts both as a pro and a con.
While developed countries seemed to be shifting towards crypto investments drastically, developing countries seemed to lag behind.
The digital divide and the lack of technical understanding are the few reasons behind the slower adoption of crypto transactions in developing nations.
Banks, on the other hand, are more accessible in terms of technology in developing nations.
They do not require ground-breaking technological knowledge and, therefore, can be the best investment choice for countries yet to overcome technological challenges.
It is also owing to the uncertainty in the crypto market that individuals preferred investing in banks, considering the latter to be a stable and secure source.
However, such notions are to topple with SVB's collapse.
Security might be the most challenging parameter to weigh crypto and banks over each other. While both try to maintain top-notch security, they are always susceptible to cyber threats.
Since both crypto and banks are primarily dependent on online transactions, the chances of personal data and credentials being hacked are not new.
In short, one cannot claim banks are more secure than crypto or vice versa. Instead, it is just the individual's trust in DeFi or traditional finance that makes them conclude so.
Though crypto transactions are based on blockchain technology, which aims to offer world-class security with the least human intervention, DeFi is yet to reach there.
Remember, the nature of cyber threats banks and crypto transactions face can be different. However, that doesn't reduce the severity of the matter and should be taken into immediate consideration.
Whether applying for a loan or availing of any service, banks require individuals to undergo a series of cumbersome paperwork.
Submitting documents, applying for a service, or waiting for the transaction can be challenging at the current time.
However, DeFi seems to have combated that pretty well. One can avail of the services at their own ease without waiting for a third party to accept their requests.
In short, DeFi offers way more independence and liberty than traditional finance. In fact, this is one of the primary reasons behind DeFi's growing popularity.
Choosing between traditional and decentralized finance can be challenging as they have several pros and cons.
While the recent failure of SVB reinstalled the confidence of crypto investors even amidst a bearish trend, shifting to a specific medium can be a tough choice. The solution?
Most finance experts claim a combination of both. This implies one must invest in diverse stocks and digital currencies to avoid going bankrupt if one of them fails.
Thus, investors must look out for the best investment opportunities in both for the best returns.