Bitcoin is a clear winner of the US banking crisis
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Silicon Valley Bank (SVB) failed on March 10, and since then the price of bitcoin (BTC) has been on a tear.
In the early hours of March 10, bitcoin was trading around $19,600. It hovered just above and below $20,000 until around 12 noon ET when it was announced that SVB was goes into FDIC receivership. At that point, bitcoin shed $200 to fall below $20,000, bounced around a bit and spent most of the weekend trading above $20,000.
By Monday 13 March at By 9:30 a.m. ET, it was trading at $22,386. And then the fun began. Just 24 hours later, bitcoin was trading at $26,175, at one point even as high as $26,500. As of publication, it is currently around $26,700.
I’ve argued (here and here and probably elsewhere) that narrative matters a lot when it comes to the price of assets. If you don’t believe me, you can ask the central bank Jerome Powell, who said that “people’s expectations of inflation have a real effect on inflation.”
So what happened to the narrative that led to this kind of aggressive 35% bottom-to-top change? It’s simple, really: A lot happened.
On the one hand, bank failures
Given Bitcoin’s history, the association with bank failures is obvious here: At least three banks have failed, others – both US and non-US – are failing. Because it’s not because of Bitcoin, it’s good for Bitcoin’s price.
Actually, it is not clear who is to blame for the three bank failures, because who even knows if these banks fail due to insolvency?
Sure, SVB failed because of an old fashioned bank run spurred on by apparent balance sheet weaknesses due to poor duration risk management. And, yes, Silvergate had problems and had to take out an FHLB loan, but the eventual liquidation was reportedly voluntary. And then we have Signature Bank, where even the regulators can’t figure out if the bank was shut down because of crypto or because of a “crisis of confidence” in management.
Let’s add the fact that there are greater risks to the wider banking system. Credit Suisse ( CS ) just received a 50 billion Swiss franc loan from the Swiss central bank, and 11 banks just injected $30 billion into California-based regional bank First Republic Bank ( FRC ) to bail it out.
On the former, it is telling that the central bank wants to save Credit Suisse. On the latter, it is even more telling that the banks want to save a competitor for fear of contagion. (Why else wouldn’t they just let a competitor fail?)
That said, we know one thing that won’t cause these banks to fail. These banks are not in trouble because of gambling on bitcoin, crypto or the companies in these industries. What seems to be happening is that the fractional reserve banking system is under stress due to rising interest rates, and it is showing cracks.
And so the narrative goes: When the banks fail, opt out and buy bitcoin. That narrative is strong enough to drive the price forward.
On the other hand, stablecoins were unstable
With the failure of Signature Bank, we saw US dollar stablecoin USD coin (USDC) lose its dollar peg last weekend. The USDC regained its peg during the week, but the loss of the peg rightfully alarmed many people. To the USDC’s credit, it’s worth considering how quick the recovery back to $1 was. That said, its depeg highlighted that the USDC is not immune to counterparty risk, as some may have mistakenly believed.
So if we determine that both USDC and dollars in a bank account have counterparty risk, you might ask yourself, “Is there anything without counterparty risk?”
Well, yes, it is with bitcoin.
A related stablecoin story also played out with the world’s largest crypto exchange by trading volume, Binance, converting $1 billion of stablecoin Binance USD (BUSD) in US dollars into bitcoin, ether and other cryptocurrencies in the morning hours of March 13. as a result of which Binance rival crypto exchange Coinbase officially closed BUSD trading on its platform due to “liquidity concerns.”
Binance’s sale not only added to the buying pressure, but could potentially have led to a “follow the leader” effect where people also exchanged their BUSD for bitcoin.
And if I had another hand, the US Federal Reserve
It looks like we may get a suspension of interest rate hikes from the US Federal Reserve, which will give the entire market a much needed breather, especially as some (myself included) see the failure of these banks as closely tied to the hike. of the rates by a multiple of almost 20 in the past year.
From CoinDesk’s Jocelyn Yang:
On Wednesday, the CME FedWatch Tool, a predictor of interest rate decisions, predicted a 45% chance of a zero basis point rate hike. It now forecasts an 80.5% chance of a 25 basis point (bps) increase. Both numbers are in stark contrast to last week when the CME showed a 68% chance of a 50 bps rate hike.
Of course, it is only the market that is jumping on the narrative that the interest rate hike may not be as high as previously expected. There has been no indication from the Fed that this will be the case. There goes that “narrative and expectation” again.
Finally: I keep saying bitcoin, but don’t I mean crypto?
No, I don’t mean crypto. I mean bitcoin.
Amid all the market turbulence, bitcoin’s price is rising faster than even the much smaller and often more volatile altcoins. We see that with bitcoin dominance, a measure that looks at bitcoin’s market capitalization compared to the rest of the cryptocurrency market, which hit a nine-month high of 45.5% on Wednesday.
So overall: There is systemic global banking risk, crypto stablecoins proved they need these banks to be stable, and amid all the general anxiety, the Federal Reserve may pull back on interest rate hikes. All of this has added to bitcoin’s massive rally over the past week.
It continues is anyone’s guess. To be sure, uncertainty is never cause for celebration because of its potential negative impacts on people’s lives. But for now, bitcoin, with its fixed issuance in an era of money growth, looks like a way to opt out of this latest crisis.
Maybe it is.