Bitcoin at ‘redemption arc’ as banking pressure mounts, AllianceBernstein says

The recent turmoil in the banking sector, from the collapses of Silicon Valley Bank, Signature Bank

SBNY

,
and Silvergate Bank

SAY

in the USA, to UBS

UBS

‘s
acquisition of its troubled Swiss peer Credit Suisse

CS

over the weekend, bitcoin’s recovery accelerated, Gautam Chhugani and Manas Agrawal, analysts at AllianceBernstein wrote in a note on Monday.

The biggest cryptocurrency jumped 66% so far this year, while it is still down 42% since the start of 2022, according to the analysts.

For comparison, the Nasdaq Composite

COMP

up 11% so far this year (see chart), while down 26% since the start of 2022. S&P 500

SPX

rose 2%, but was still down 18% since the beginning of last year. Gold

GC00

achieved 8% so far this year and held the same return since the start of 2022. The dollar

DXY

was flat since the turn of the year, but is up 8% from the beginning of last year.

Analysts at AllianceBernstein called bitcoin “an insurance against financial disclosure” and “unintended consequences of the government’s excessive monetary and fiscal discretion.”

In recent weeks, smaller U.S. banks have lost deposits to larger U.S. banks and the money market, adding to short-term liquidity stress, the analysts noted.

Meanwhile, the possibility of a recession could pose challenges for banks in terms of asset quality in the interim, according to the analysts.

Also, a recession would likely lead to lower tax collections, potentially worsening the situation around the US debt ceiling and the country’s fiscal deficit, the analysts noted.

“If something in the government/central banking apparatus breaks down, bitcoin/crypto will benefit from such an event,” the analysts wrote.

Bitcoin has also traded as a risk-off asset, starting to decouple from U.S. stocks in November, when crypto exchange FTX collapsed, the analysts said.

The cryptocurrency industry has long touted itself as an alternative to government-issued currencies, such as the dollar.

While bitcoin and stock returns showed negligible correlation from 2010 to 2020, their correlation increased as the Federal Reserve eased monetary policy since the start of the pandemic, as most risk assets flourished following the Fed’s policy actions, the Bernstein analysts noted.

“We expect that as monetary policy finds a new normal, the correlation should return to the pre-pandemic trend,” the analysts wrote.