Cryptoverse: Bitcoin passes the bank’s stress test

March 21 (Reuters) – As the crisis stalks the traditional world of stocks and bonds, bitcoin suddenly looks like a safe haven.

The notoriously volatile cryptocurrency seems positively healthy and solid, just as a bank meltdown drives markets into the arms of a recession.

Bitcoin is up 21% this month, while a choppy S&P 500 has lost 1.4% and gold is up 8%.

“If you were to describe an environment where there were consecutive bank runs because central banks are trying to fight inflation with rapid rate hikes, that’s pretty close to as spot-on a thesis for owning bitcoin as you’ve ever heard.” said Stéphane Ouellette, CEO of investment platform FRNT Financial ( FRNT.V ).

For now, the cryptocurrency has cut ties with stocks and bonds and tagged along to a rally in gold, fulfilling at least one part of creator Satoshi Nakamoto’s dream — that bitcoin could serve as a refuge for distressed investors.

Bitcoin’s 30-day correlation with the S&P 500 (.SPX) has fallen to negative 0.12 in the past week, with a measure of 1 indicating that the two assets are moving in lockstep.

A selloff in banks has wiped out hundreds of billions of dollars in market value and forced US regulators to launch emergency measures. In the past couple of weeks, Silicon Valley Bank and crypto lender Silvergate have gone under, while Credit Suisse has teetered on the brink.

‘GO BACK TO THE CORE ETHOS’

However, let’s not get carried away. This is bitcoin.

“The bearish argument would be that this momentum is temporary and ultimately this rally is not going to sustain,” Ouellette said.

It remains to be seen whether bitcoin’s bullishness will last as attention shifts to the Federal Reserve’s policy meeting this week, where the US central bank must walk a fine line as it battles inflation and banking stress.

Moreover, cryptocurrency’s allure has not only been about security.

The rapid price rise has forced some short sellers to cut their bets and buy back coins. Data from Coinglass shows that traders liquidated crypto positions worth $300 million on Monday, with most of the total — $178.5 million — short positions.

Nevertheless, bitcoin is resurgent.

It now holds nearly 43% of the total crypto market, its highest share since last June, according to CoinMarketCap data, while the total cryptocurrency market capitalization has jumped 23% to $1.1 billion since March 10.

“We are seeing a return to bitcoin’s core ethos, that of a financial asset independent of the opacity and interference of the centralized financial system,” said Henry Elder, head of decentralized finance (DeFi) at digital asset investment manager Wave Digital Assets.

The usual banking crisis has also led to some interest in DeFi, with the total value of tokens linked to such platforms rising to $49 billion from $43 billion last week, according to DappRadar.

BITCOIN IN A BANKING CRISIS

However, not all areas of the digital world have been immune to the banking fallout. No. 2 stablecoin Circle USD or USDC lost its 1:1 link to the dollar after revealing that the reserves were parked at the closed Silicon Valley Bank.

As concerns spread over USDC’s ability to maintain its peg, its market capitalization fell to $36.8 billion last Friday from $43.8 billion a week earlier, even as leading stablecoin Tether gained about $4 billion.

Market participants said some USDC withdrawals were also likely reinvested in bitcoin, helping to fuel the rally.

“It is too early to say that bitcoin has proven the narrative that it is an alternative in a banking crisis,” warned Ed Hindi, Chief Investment Officer at Tyr Capital in Geneva.

But he added: “The rally we are currently witnessing in bitcoin will be looked back on as the time when the main asset as a decentralized non-sovereign asset was stress tested.”

Reporting by Medha Singh and Lisa Mattackal in Bengaluru; Editing by Vidya Ranganathan and Pravin Char

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