Bank volatility causes crypto rally, but won’t end crypto winter
A “crypto rally” was one of the immediate consequences of the collapse of Silicon Valley Bank (March 10, 2023) when the price of Bitcoin skyrocketed.
Bitcoin rose from $20,447 on the morning of the bank’s collapse, climbing steadily to $27,818, at the time of writing.
The driving force behind the Bitcoin rally is far more theoretical than practical, says GlobalData thematic research analyst Suneet Muru.
“The original purpose of Bitcoin was to be an alternative to fractional reserve banking – decentralized payment technology designed to eliminate the need for centralized trust. So naturally, as contagion spreads among big banks, their headwind can become crypto’s tailwind,” says Muru.
The basic principle behind Bitcoin was to give the citizen greater control over their money through a decentralized system. In fact, the first block of the Bitcoin blockchain – called the genesis block – contains the following text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” A reference to political systems that are closely intertwined with the world’s banking systems and a conscious rejection of the banking systems’ centralized nature.
But if the rally continues, Muru envisions that the rationale for institutional investors will be that they see Bitcoin as a temporary, short-term safety measure to limit exposure to deposit risk from banks.
“I don’t see the end of the crypto winter,” adds Muru.
The consensus within the cryptocurrency ecosystem is that a high interest rate environment was the first domino in the crypto winter because it killed the risk on trading and plunged the crypto market value, says Muru.
“It seems very convenient to now call Bitcoin a ‘safe haven’ asset because interest rate hikes hit centralized banks relatively worse,” adds Muru.
In addition, the crypto ecosystem has its own crisis of confidence for investors following the collapse of one of the world’s largest crypto exchanges, FTX. In March 2023, Silvergate, a lender to crypto companies, including FTX, announced bankruptcy.
The long-term beneficiaries of today’s regional banking volatility – especially in the US – will be larger, trusted institutions and not the cryptocurrency industry.
Reports have emerged of a rush to safety by investors against top tier multinational corporate banks. In the US, JP Morgan, Bank of America, Citibank and Wells Fargo have much to gain from the loss of confidence in smaller, regional banks.
“In terms of the wider sector, there will be a flight to quality as larger banks soak up deposits and credit will be less available and only extended to low-risk borrowers,” concludes Stephen Walker, Global Data fintech thematic analyst.
