Why Bitcoin could finally be decoupled from global stock markets

Last week, the US central bank raised interest rates by a further 25 basis points, despite the drama engulfing the US banking sector.

The European Central Bank (ECB) is also sticking to its rate hike canons, even as contagion from the US sends ripples through the European banking sector and Credit Suisse is taken over by UBS.

Meanwhile, Britain continues to struggle with runaway inflation.

This begs the question: will we see higher prices for a longer period of time and what will be the impact on cryptocurrency markets?

It appears that central banks are still keen on raising interest rates, despite the detrimental effect this has on smaller banks.

The Fed is not alone in this. ECB chief Christine Lagarde indicated last Wednesday that the central bank’s intentions to continue targeting inflation were under control.

Although the ECB has already raised interest rates by a record 350 bps since July 2022, inflation in the eurozone remained high at 8.5 percent in February.

On the same day, the UK Office for National Statistics (ONS) released its data for consumer price growth in February, which surprised on the upside with an annual increase of 10.4 percent.

This is up from 10.1 per cent in January and suggests that Britain’s struggle with the cost of living crisis is far from over.

The news puts renewed pressure on the Bank of England to continue its own rate hike cycle, as the economy shows no signs of cooling.

In fact, Trading Economics now predicts that the US federal funds rate will remain above 4 percent through 2024, while UK and Eurozone rates are expected to decline by just 50 bps from current levels by the end of next year.

Nevertheless, even though the world’s central banks are raising interest rates, they have simultaneously turned the liquidity taps back on.

QE is back

Last week, the Fed, along with five other major central banks, announced an unprecedented “joint liquidity operation” to support struggling local lenders and avoid another 2008.

US regional banks have seized that lifeline, causing the Fed’s balance sheet to swell by $297 billion to $8.63 trillion in just one week, undoing much of its quantitative easing program.

In short, QE (quantitative easing) is back – despite the Fed’s claims to the contrary. And as you might expect, this is having a detrimental effect on the US dollar, which has traded lower against a basket of currencies over the past two weeks.

All of this is good news for cryptocurrency prices. As the purchasing power of the US currency deteriorates, investors are beginning to look for alternative safe havens.

Unlike the dollar, Bitcoin has a built-in supply cap, so it is an obvious antidote to rampant money printing.

This is just one of the reasons we saw the biggest cryptocurrency fly past the $28,000 mark last week, helping it climb nearly 70 percent year-to-date.

Loss of faith

More importantly, as banking threatens to destabilize the entire financial system once again, Bitcoin is coming into its own as a hedge against another financial collapse.

The demise of Silvergate and Silicon Valley Bank, and the fallout that followed, have highlighted the fact that the existing financial system is broken and the cracks are beginning to show.

Any measures taken to fix it after 2008 have clearly failed, as the banks once again find themselves at the mercy of government bailouts.

The only difference this time is that government bonds are responsible for their fall, not mortgage-backed securities.

With interest rates continuing to rise, pushing up the yield on these bonds, it is clear that the fallout is far from over.

As cash-strapped depositors head for the door, smaller banks are particularly vulnerable to further bank runs.

Indeed, banking giants such as Bank of America are receiving inflows of funds from smaller banks as the sector faces a crisis of confidence.

Cryptocurrencies — in pictures

The only game in town

As trust in banks and government rapidly erodes, Bitcoin will remain the only game in town.

Let’s not forget that it was born as a direct result of the previous financial crisis, with the goal of building a better and fairer financial system.

And while last time there was nowhere to hide, this time there is an option for those who lose faith in the establishment.

This is precisely why Bitcoin is rallying amid the doom and gloom, even shrugging off the latest US interest rate hike.

In the coming months, as contagion spreads through the banking sector, we may see the long-awaited decoupling of Bitcoin from global equity markets as it continues its upward journey.

It’s time we finally learned our lesson and stopped trusting a centralized system that has failed us time and time again. The future is decentralized – and this is just the beginning.

Stefan Rust is CEO of the independent inflation data aggregator Truflation and former CEO of bitcoin.com

Updated: 29 March 2023 at 04.00