Bitcoin up 75% YTD as banking crisis resurfaces

The latest trigger for Bitcoin’s rally comes from First Republic Bank’s (NYSE:FRC) earnings report and rumors of a federal seizure.

For a long time, after Bitcoin was launched, it was common to say that Bitcoin is a hedge against inflation. After much adoption and maturity, this thesis was tested in 2022 when the Federal Reserve began the fastest hiking cycle in 40 years to curb an equally historic rate of inflation. Bitcoin’s price hit $30,000 today as another US bank looks set to collapse.

h2 Bitcoin gains from banking problems/t2

As the Fed increased the M2 money supply by 39% from 2020 to 2022, all crypto assets benefited. The historic surge in liquidity boosted both stocks and crypto, with the latter approaching the $3 trillion market cap in November 2021. This is when Bitcoin’s price hit an all-time high of $67.5,000.

But when the Fed started undoing the damage it caused, the inflation, it was all downhill from there for Bitcoin. As quantitative easing (QE) turned into quantitative tightening (QT), the dollar strengthened and the Bitcoin price declined. This was reinforced when the central bank popped the balloons of major crypto players, from Terra and Celsius to 3AC and FTX.

But as the hiking cycle comes to an end and the Fed shakes the legs of more fragile commercial banks, Bitcoin is booming again.

Of the three banks, the fall of Silvergate, as a provider of fiat-to-crypto rails for exchanges, was the only one to exert negative pressure on the Bitcoin price. Image credit: Trading View

From this dynamic, Bitcoin is not so much a hedge against inflation as first speculated. More precisely, it is now more clear that Bitcoin is primarily a hedge against currency depreciation. On a broader scale, it is a hedge against the more significant instability caused by central banks via their fractional reserve system, where banks only hold a fraction of customer deposits.

This is in stark contrast to the entire concept of Bitcoin, which offers decentralized self-storage of a finite coin supply that cannot be printed at will.

h2 First Republic Bank: the last domino to fall?/t2

First Republic Bank (FRC) released its first quarter earnings report on Monday. Year-over-year, the bank’s total deposits shrank from $176.4 billion to $104.4 billion, higher than expected. When the emergency injection of $30 billion from big banks is excluded, that means a deposit of $102 billion.

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Only 52% of these deposits were insured. More importantly, the FRC has $80.3 billion in short-term debt, with $63.5 billion from the Federal Reserve’s discount window. This is a clear sign of financial distress, reinforced by lower bank loan interest rates.

Monthly deposit shrinkage of the US banking sector over one year. Image credit: CEIC Data

Indeed, FRC has $103 billion in real estate loans with a yield of 3.18%, while its short-term loans range from 4% to 5.15% interest. Today’s capital depletion makes the bank’s operating model unsustainable.

According to a CNBC exclusive, the bank’s advisers are trying to add another injection of liquidity from the big banks. But since FRC stock is in a -95% free fall so far this year, the FDIC is likely to seize the bank sooner rather than later.

h2 Banks are not money warehouses/t2

At the end of the day, people’s confidence in banking depends on the Federal Reserve. Unfortunately, the central bank tends to destabilize commercial banks in a number of ways:

• In a walking cycle, increased borrowing costs reduce banks’ profitability as it increases their debt exposure.
• In an upward cycle, increased borrowing costs also increase loan defaults, leading to losses for commercial banks.
• In a walking cycle, the banks’ net interest margin tightens between borrowing at a lower interest rate and lending at a higher interest rate, with interest on deposits exceeding interest on loans.
• In a tour cycle, especially one as sharp as this one, greater volatility means a greater inability to raise capital.

The tour cycle itself, of course, was tripped up by the Fed’s unprecedented flood of liquidity. In particular, this string of vulnerabilities is baked into the Fed’s monetary policy. Current Fed chairman Jerome Powell said so himself in 2012 when he served as a member of the board.

“In the meantime, we look like we’re blowing a fixed income duration bubble across the credit spectrum that will result in big losses when interest rates rise. You could almost say it’s our strategy.”

With the bank credit crunch now in play, recession is the most likely scenario.

On the upside, recession is inflation’s kryptonite. Likewise, the Fed will enter the rate cut cycle to stimulate the economy. In that scenario, Bitcoin only has advantages. Considering these macro dynamics, Standard Chartered’s digital division head, Geoff Kendrick, said on Monday that Bitcoin could reach a new ATH of $100k by the end of 2024.

Neither the author, Tim Fries, nor this website, The Tokenist, provides financial advice. Please see our website guidelines before making any financial decisions.

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Disclaimer: This Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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The tokenist