Bitcoin rebounds from banking crisis rout. It may be too good to be true.

Bitcoin plunged as low as $19,600 in recent trading, driven down by widespread fears about financial stability after the US government shut down Silicon Valley Bank on Friday and stablecoin USDC lost its peg to the dollar over the weekend. The biggest digital asset continued to march higher Sunday even after news that Signature Bank (ticker: SBNY ) was also shut down by regulators, the second major banker to the crypto industry to lose in a week after Silvergate Capital’s ( SI ) failure in March 8.

“With both Silvergate Capital and Signature Bank collapsing, it also leaves a gaping hole in financial supply for the crypto sector. There is still unease about the damage caused,” said Susannah Streeter, analyst at brokerage Hargreaves Lansdown.
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The swift deletion of the two central US bankers to crypto companies represents not only an existential risk to the industry – and perhaps a chilling reminder of the sentiment towards digital assets among regulators – but also a blow to market functioning.

As crypto looks increasingly debanked in the US, liquidity in digital asset markets is already suffering. Bitcoin liquidity on Coinbase Global (ticker: COIN) has fallen 45% since the beginning of March, with a big drop in liquidity over the weekend, according to Conor Ryder, analyst at crypto data provider Kaiko. Lower liquidity means there are fewer buyers and sellers and is a key factor driving volatility.

“The mood is more about deflation than panic,” said Michael Safai, managing partner at crypto trading firm Dexterity Capital. “Companies will spend the next few days figuring out how to recoup any capital still locked up in these failed banks and how the markets will work with an isolated US market.”

Make no mistake: The long-term implications of crypto losing important connections to US banks are negative. Prices pushing higher in the short term is a puzzling move, but is likely driven by at least four factors.

The first is the correlation between digital assets and the stock market, largely driven by shared sensitivity to a macro backdrop of high inflation and rising interest rates over the past year. Stocks and cryptos have come under pressure in the past week on concerns that the Federal Reserve will increase the pace of interest rate hikes this month, but the crisis of confidence across banks has pushed traders to rule out a major rate hike. From a macro point of view, it is supportive for both crypto and stocks, with

Dow Jones Industrial Average

and

S&P 500

ready to jump monday.

The second is expected buying pressure to support the crypto market from Binance, the world’s largest crypto exchange by far. “Given the changes in stablecoins and banks, Binance will convert the remaining $1 billion Industry Recovery Initiative funds from Binance USD into native crypto, including Bitcoin, Binance Coin and Ether,” Binance CEO Changpeng Zhao tweeted late Sunday.

The third is technical market factors. As prices fell over the weekend, traders may have been too eager to take bearish positions by betting on further declines. As stock futures rallied late Sunday on news of a resolution to the crisis at Silicon Valley Bank — and the closure of Signature Bank — bearish traders were wiped out. Nearly $200 million in short positions against Bitcoin were forced out, or liquidated, on Sunday and Monday, according to crypto data firm Coinglass, adding buying pressure to a market that was already turning higher.

The fourth is that Circle Internet Financial, which issues the USD Coin stablecoin that was delinked from the dollar over the weekend, appears to be out of the woods. Circle held a significant amount of the assets that backed USDC in Silicon Valley Bank, and the news that depositors will be repaid in full removes the risk that the stablecoin is not secured.

Beyond Bitcoin,

Ether

—the second largest crypto—jumped 7.5% to $1,580. Smaller cryptos or altcoins showed much of the same, too

Cardano

up 8% and

Polygon

rising 4%. Memecoins were also up, with

Dogecoin

get 4% and

Shiba Inu

3% higher.

Write to Jack Denton at [email protected]