Bitcoin’s price rises as it emerges as a safe haven and traditional finance faces turmoil
Bitcoin has regained its luster as digital assets outperform traditional finance (TradFi) recent turbulence. With the collapse of Silvergate, Silicon Valley Bank (SVB), Signature Bank and most recently Credit Suisse, cryptocurrencies seem to have become a safe haven among the mismanaged TradFi establishment.
On March 8, rumors of trouble at SVB led to digital assets becoming entangled in the situation. The announcement that $3.3 billion of Circle’s dollar-backed USDC stablecoin was held at SVB led to the stablecoin being delinked from the US dollar. This led to investors in digital assets selling positions on major stock exchanges. Bitcoin fell from 22,410 to 19,500, and ether fell almost 200 points from 1,560 to 1,368, breaking below the 200-day moving average momentarily before recovering.
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Friday 10 By March, news of the biggest bank failures since 2008 had consumed the financial media, and banking indices plunged on fears of widespread contagion. The S&P Regional Banking Index (KRE) lost over 28% in about five trading days and has yet to recover.
On March 12, the Federal Reserve and the Federal Deposit Insurance Corporation announced that they would insure the deposits of the failing banking institutions to prevent a deeper run on banks and allay fears of contagion. The actions were clear enough to stop a major failure, but not enough to prevent depositors from withdrawing billions of dollars. Ironically, the biggest winners in this latest debacle have been risk assets, especially digital assets like bitcoin and ether.
While the correlations between the stock market and digital assets have always remained in flux, one of the most consistent predictors of crypto prices has been the global money supply. This recent onslaught of bank insolvencies has created a new mandate for central banks to stop the bleeding by printing more cash.
The chart of M2 and total crypto market value tells enough about how liquidity affects the net demand for digital assets. If the current rally since March 11 is to be believed, crypto predicts that central banks will need to keep pushing to avoid (another) financial crisis.
Not surprisingly, this deterministic view of M2 = “bitcoin go up” is not as simple as it seems, as the Federal Reserve still has to compete with rising inflation and high unemployment levels. On March 10, wage figures came in above expectations, and just four days later the consumer price index showed a 0.5% increase in inflation. None of these figures have helped Chairman Jerome Powell fulfill his mandate, but they have put pressure on the Fed to keep raising interest rates.
The conflicting data raises the question of how the Fed will respond to both rising inflation and failing banks. The printing has already begun, but interest rate hikes will only exacerbate the problem and cause more banks to fail.
A look at the forecast for the interest rate increase since 6 March gives a good picture of how quickly the situation is developing.
What was largely predicted to be a year of higher for longer interest rate policy has changed drastically to pause, and eventually pivot, in the coming quarters. Politics anywhere in between is possible at this point. The Fed’s “dot-plot” forecast released March 22 will provide a critical window into the confidence of members of the Federal Open Market Committee as they try to predict how effectively central banks can navigate hot macro data while protecting financial institutions.
In the middle of all this confusion sits crypto, which has risen steadily and is now seen by many investors as a bulwark against another financial crisis. But can digital assets completely escape the path of declining economies? Should a banking crisis, inflation or further interest rate hikes produce the hard landing that many assume is inevitable, will bitcoin be the escape pod?
