Adoption and nerves — Crypto pumps in the middle of a banking crisis

On March 19, the US Federal Reserve announced that it had entered into a joint program with several major central banks – including the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank – to support cash flows in US dollars and alleviate strains in global funding markets.

Furthermore, Fed Chair Jerome Powell said that swap lines – agreements between two or more central banks to maintain a crucial liquidity backstop and ease the strain on global financial markets – would remain active until at least the end of April.

This could lead to the Federal Reserve slowing rate hikes, which has been cited as a contributing factor to the ongoing banking crisis.

Since early March 2023, several major financial entities, including Silvergate Bank, Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse, have collapsed.

Despite these developments, Bitcoin (BTC) has rallied, hitting a high of $28,500 on March 24, the highest level since the crypto crash of June 2022. After a decline in March, where the flagship cryptocurrency fell below $20,000, it looks Bitcoin has resumed its rally in 2023.

Since January, when Bitcoin traded at around $16,500, the digital asset has gained an impressive 72.73%. Of the roughly 4,600 days of Bitcoin as a tradable asset, investors have experienced 4,065 profitable days, challenging the volatility-driven narrative surrounding the crypto ecosystem.

The banking crisis explained

In recent weeks, the global banking industry has been shaken by a series of events, which have sent shock waves through the financial markets. In Europe, Credit Suisse collapsed and had to be “rescued” by rival bank UBS.

This development did not surprise those following Credit Suisse’s financial and legal troubles, which have been widely reported for months.

The Swiss National Bank and the Swiss Financial Supervisory Authority agreed to support Credit Suisse with an emergency loan of 50 billion francs ($54.5 billion) if needed. UBS agreed to buy Credit Suisse for $3.25 billion, which is less than half its market value just days before, but much higher than the original offer of $1 billion, which Credit Suisse rejected.

Meanwhile, the US is facing its own banking crisis across the Atlantic. Several banks, including SVB, Signature Bank and Silvergate Bank, have collapsed recently, prompting the Federal Reserve and the government to bail out depositors. The banks mentioned above all faced major bank runs. These incidents usually occur when a bank loses the trust of its customers, resulting in mass withdrawal requests.

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In response to these developments, the Fed has used the Bank Term Funding Program (BTFP) to inject additional liquidity into the banking system and cover deposits, with policymakers assuring the public that the banking system is safe. Although these actions have attempted to restore confidence in the banking system and financial markets, some analysts warn that they may only provide a short-term solution.

A recent study has shown that the US banking system is highly vulnerable, with many banks potentially becoming technically insolvent during a bank run. Assuming the worst-case scenario of 100% uninsured deposits is drawn out, the study’s authors note that over 1,600 US banks could collapse overnight. What’s even more head-scratching is that the researchers suggest that even if only 30% of uninsured deposits were withdrawn, 106 banks would collapse.

The numbers seem to be in favor of crypto

Bitcoin has been on a roll, gaining more than 13% in the past week and trading at $28,430 at the time of writing. The problems facing the traditional banking system have raised concerns about trust in traditional assets, with more money appearing to flow into Bitcoin. According to data from Coinglass, open interest in Bitcoin futures reached $12 billion over the weekend, an annual high that points to renewed interest in the flagship cryptocurrency.

Bitcoin open interest refers to the total number of outstanding positions in Bitcoin futures contracts that have not been closed or settled. It is a measure of market activity and interest in trading Bitcoin futures. When open interest is high, it indicates a lot of investor interest in BTC and vice versa.

Meanwhile, most altcoins are also experiencing a pump, with most of the top ten cryptocurrencies by market cap – XRP (XRP), Cardano (ADA), Ether (ETH), Solana (SOL) and Litecoin (LTC) – posting gains of 5 -20% in the last week.

The renewed interest in crypto comes amid growing concerns about inflation, rising global debt levels and the unprecedented monetary and fiscal policies adopted by central banks and governments worldwide.

What’s in store for crypto?

With the ongoing fiscal momentum surrounding the crypto sector showing no signs of abating, $30,000 has continued to serve as a significant hurdle for Bitcoin. However, if the digital asset approached or broke this level, many bulls could rake in short-term profits for themselves, potentially causing the cryptocurrency to fall again.

In an interview with Barron’s, Alex Thorn, head of research at digital asset group Galaxy, said we could be witnessing a seminal moment for Bitcoin. He believes that as the partially reserved banking system teeters on the brink, “Bitcoin’s resilience, predictability and relative safety stand in stark relief.”

Also, the Crypto Fear & Greed Index reached its highest index score this year, registering 66 on March 20. These levels have not been seen since Bitcoin posted its all-time high in November 2021. As of March 24, the index sits at a rating of 61, placing it firmly in “Greed” territory.

The Crypto Fear and Greed Index aims to numerically present the current “feelings and sentiments” towards Bitcoin and the cryptocurrency market, with a maximum score of 100. The last time the index registered a score above 66 was on November 16, 2021, just days after Bitcoin’s all-time high of $69,000.

Chris Bradbury, CEO of decentralized finance platform Oasis.app and former chief product officer of MakerDAO, told Cointelegraph that the recent rally is related to bank collapses and the broader fear in the US and European banking sector, which saw huge value wiped out of banking stocks. He added:

“We are unlikely to see a sustained rally directly from this; However, we have started to see that activity in the chain has picked up again since the beginning of the year and a bit more optimism more generally in the markets.”

Other observers of the crypto space believe the recent pump is explained by factors less generous to the hypothesis of crypto as a safe haven and alternative to the traditional financial system.

Crypto researcher and software engineer Molly White recently noted that Bitcoin, among others, is experiencing low liquidity and can also serve as an exit for traders nervous about stablecoins. Since USD Coin (USDC)-to-dollar exits were limited early in the banking crisis, many decided to move to different cryptoassets like Bitcoin, White argued.

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She further stated that influential people can benefit from an increased Bitcoin price. Ex-Coinbase CTO Balaji Srinivasan bet $2 million that Bitcoin will reach $1 million in the next 90 days based on a belief that incoming liquidity from the Fed will “hyperinflate the dollar.”

As White said, “If he owns a lot of Bitcoin already, or has OTM [out of the money] long positions, $3 million (counting the two bets plus $1 million in tweet payments) would be a small price to pay if he can get BTC to tick up a few percentage points.”

As we move into a future plagued by increasing financial uncertainty, it will be interesting to observe how the crypto market fares through the macroeconomic uncertainty permeating the global economy.