Bitcoin’s biggest bull case: Bank turmoil and the regional banking crisis

With four banks collapsing this year, many are worried about the state of the US banking system.

But cryptocurrency, which had a tough 2022, has made a striking recovery. Bitcoin (BTC/USD), the largest cryptocurrency by market cap, is up 62.7% year-to-date, while the S&P Cryptocurrency Broad Digital Market Index is up 50.6% so far this year. By comparison, the Dow Jones US Banks Index is down more than 14% so far this year.

The regional banking crisis has resulted in people flocking to crypto and blockchain-based assets to secure liquidity, thus returning as investors as the asset rises in price. For example, Gamestop Corp. has recently seen an increase in volume on the platform, with some assets hitting five- and six-figure volume peaks. In the startups market, retail investors have invested over $900,000 in Gameflip for their digital asset and NFT marketplace.

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Banking crisis today

Credit Suisse Group closing the doors sparked concern over the German giant Deutsche Bank AG collapses and worries that bank failures will spread across Europe’s banking sector. This comes after two US banks – Silicon Valley Bank and Signature Bank – collapsed earlier this year.

But the troubles don’t end there. A study by the Social Science Network states that 186 banks are at risk if depositors withdraw their uninsured deposits.

The banking crisis today is very different from the situation in 2008 because the use of social media has allowed the rapid spread of misinformation and market panic. Social media provides “more opportunity to spread harmful rumours”, according to Jon Danielsson, director of the Systemic Risk Center at the London School of Economics.

The first banking crisis of the Twitter generation saw Silicon Valley Bank, then the 16th largest bank in the US, crumble in a matter of days – faster than any bank collapse in history.

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Crypto trend reversal

Investors are increasingly turning to decentralized cryptocurrencies as the banking crisis shakes global markets. After the failures of Silicon Valley Bank and Credit Suisse, several institutional investors have designated Bitcoin as a safe haven. While the collapse of popular crypto-focused bank Silvergate Capital earlier in March caused decentralized tokens to retreat, the banking crisis has seen cryptocurrencies take off.

“I continue to advocate Bitcoin as a hedge against the current antiquated and over-regulated banking system and as a hedge against bad government with too much regulation,” said billionaire investor and venture capitalist Tim Draper. “I have recommended it to all CFOs [chief financial officers] as a hedge against bank or government failure by having at least two payrolls worth of Bitcoin to avoid catastrophic failure.”

Ark Invest founder and CEO Cathie Wood expects Bitcoin to rise exponentially if the bank contagion further exacerbates market panic. Wood stated that the largest cryptocurrency is “playing the store of value role right now. And if the global monetary systems right now, shall I say, lose confidence in people in general, there will be a shift to more crypto from a store of value point of view, absolutely.”

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Fed Taper and Crypto Market Opportunities

The Federal Reserve’s hawkish stance and subsequent interest rate hikes were one of the main factors behind crypto’s fall. The Fed raised the benchmark federal funds rate seven times last year, causing Bitcoin to plunge by more than 60%.

But in the wake of financial contagion – the spread of an economic crisis from one market to another – the Fed has begun to scale back rate hikes. The central bank raised interest rates by a quarter of a percentage point in March, which is significantly lower than the rate increases in 2022. Powell revealed in the statement from the Federal Open Market Committee (FOMC) after the meeting that the precarious banking situation was one. of the main factors behind the relatively low interest rate increase.

Crypto assets are poised to benefit from the slower interest rate hikes as investors branch out into alternative sources of investment. The troubled macroeconomic backdrop is expected to make decentralized currencies more attractive.

“As players begin to understand the role that US monetary policy, inflation and interest rate hikes have played in the current challenges in the banking sector, you are likely to see a move towards Bitcoin and other forms of crypto as a reflection of their potential value as a hedge and alternative store of value in such times, said CEO Gabriella Kusz of the Global Digital Asset & Cryptocurrency Association.

Challenges ahead for the cryptocurrency industry

Analysts have called the first banking crisis of the social media era a “sentiment contagion” rather than a “financial contagion.” As the crypto rally was driven primarily by market fears surrounding a systemic collapse of the banking sector, this current uptrend could be a bull trap. Also, demand for risk-free safe haven assets is usually higher during periods of recession.

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