Opinion: Bitcoin surges amid banking crisis, but the reason isn’t what crypto bros think

Jacob Silverman is a journalist in New York. He is the author of two books and host of the new CBC podcast about the fall of cryptocurrency exchange FTX, The naked emperor.

As a slow-motion banking crisis rippled through the markets in recent weeks, something strange happened: Crypto prices surged, with Bitcoin rising from a low of around $20,000 to about $28,700 in a week. Other tokens followed. By recent market standards, this is practically a bull run, and the crypto industry reacted accordingly, proclaiming crypto as a safe haven amid greater financial turmoil. Here was one of the much sought after use cases – while regular banks suffer, crypto only grows.

As appealing as this narrative—and the short-term price rally—may be to crypto bros, it doesn’t hold up well to scrutiny. Crypto prices are notoriously volatile and prone to market manipulation, so while an immediate spike may seem to bode well when mainstream finance is on the fritz, it’s hard to extrapolate any larger truths here. A fleeting burst of market enthusiasm cannot mask the existential problems facing a battered crypto industry entering a broader environment of economic uncertainty.

Deciphering a crypto price rally can feel about as reliable as astrology, but we can point to some possible factors. Tether, the industry’s most popular stablecoin, minted $5 billion worth of USDT tokens in the same week that Bitcoin rallied. Major mintings of Tether have previously been linked to Bitcoin price movements.

To be sure, crypto supporters claim that such large coinages are not created out of thin air, but simply reflect many people buying Tether to buy Bitcoin. But the company behind Tether, like many others in crypto, has consistently refused to fully disclose its books or provide meaningful evidence that the stablecoin is actually backed one-to-one by the dollar.

Meanwhile, another stablecoin, USTD, saw its market cap climb around $1 billion. Binance, the largest crypto exchange in the world, announced that it was converting about $1 billion of its BUSD stablecoin into “native crypto,” meaning Bitcoin, Ethereum, and possibly other tokens.

The bottom line is that the recent rise in Bitcoin prices can be traced to the fact that some major players moved a lot of crypto – and quite publicly, too.

When you zoom out, it’s hard not to see a difficult future for consumer crypto. FTX’s collapse in November may have been the most significant event of last year, but the fall was preceded by a number of other companies that failed. Lawsuits and prosecutions are blooming like spring flowers. We are a long way from the Bitcoin high of $69,000 in November 2021, or the peak consumer retail volumes in May 2021. The industry’s reputational headwinds have only increased with the indictment of Sam Bankman-Fried, the supposed face of crypto, on 12 charges.

With the closure of Silvergate Bank and Signature Bank, crypto’s fiat onramps and offramps are also closing. Like any industry, crypto companies need access to the mainstream banking system and to real dollars. If US banks won’t take their money, as increasingly seems to be the case, they will start taking it overseas. Coinbase, a publicly traded, regulated US exchange, has discussed expanding overseas. It has lost hundreds of millions of dollars per quarter in the US. Most reporting indicates that crypto companies will start parking their money in the Caribbean or favorable European jurisdictions.

Crypto partisans have accused the Biden administration of essentially declaring war on crypto. The closing of Signature Bank has been cited as premature — a supposedly healthy bank closed because it grew too close to a now-toxic industry. Signature’s problems appeared to extend far beyond working with beleaguered crypto companies. But the first point is not necessarily wrong. The Federal Reserve, aware of risk, has issued rules around digital assets that have the effect of discouraging mainstream banking from working with these companies. President Joe Biden’s executive orders have centered on “responsible development of digital assets,” often with a focus on consumer protection. This week, the White House released a comprehensive economic report that included a section examining digital assets. The conclusion: “Crypto-assets to date do not appear to offer investments of any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion or make payments more efficient.”

Whether the crypto industry and investors agree with this conclusion, it is one they will have to contend with, both politically and in public consciousness. The everyday retail customers I talk to – people who put down $500 or maybe $5,000 in crypto – tend to be disillusioned. They no longer buy the hype or the promise of future rewards. If they didn’t lose their money, many of them can’t even access what is supposedly theirs – it’s stuck on FTX or Celsius or BlockFi. Bankruptcy processes can take years to play out, leaving people with only a fraction of their original investment.

Meanwhile, as crypto experiences a brief stablecoin-driven boom, big investors may be smiling as their balances rise, but they are potentially part of a shrinking market.