Why the Silicon Valley Bank debacle may have led to Bitcoin’s jump

What a weekend. For those who aren’t sure of all that’s going on, let’s bring you up to speed: The most significant bank failure since the Great Recession occurred on Friday when Silicon Valley Bank (SIVB -60.41%)the country’s 18th largest bank, went belly up.

The start of the meltdown occurred early last week when Silicon Valley Bank said it had sold a portion of its portfolio consisting mainly of US Treasuries, or Treasury bonds at a loss. Because the Federal Reserve has raised interest rates in an attempt to control inflation, Silicon Valley Bank’s portfolio ended up underwater.

As soon as the announcement was made, a bank run ensued as depositors tried to withdraw their money as confidence in the bank waned. A total of $42 billion was withdrawn on Thursday alone, making it the largest bank run in US history.

A glimmer of hope

While the markets were in scramble mode Monday trying to make sense of what happened over the weekend and whether there would be any other casualties, there was one bright spot — Bitcoin (BTC 1.72%). Largely brushed off by the hysteria in the stock market, Bitcoin climbed more than 15% at one point.

There are likely a handful of reasons why Bitcoin jumped in light of the Silicon Valley news, but one of the most prominent may be related to renewed confidence in Bitcoin’s allure as an alternative to the US fractional reserve banking system.

There is a lot to unpack. But starting to understand how banks operate is step one to understanding why Bitcoin is becoming a more attractive replacement for the status quo.

For similar reasons that led to the demise and bankruptcy of the now infamous crypto exchange FTX, banks keep only a fraction of the deposited money in their reserves and then use the rest to engage in other speculative activities, such as making loans. Although the banking industry is heavily regulated and supported by the federal government, they are not immune to making bad decisions.

To combat this reality, Bitcoin was created in 2009 to give people another way to store value that didn’t rely on opaque and sometimes unsound banking practices (look no further than the 2008 Lehman Brothers fiasco).

With Bitcoin, a new financial world is emerging – one that is the antithesis of the modern banking system as it offers users a transparent, fault-tolerant, decentralized, highly secure network that does not depend on any human or agency to maintain it. running. This is not to say that Bitcoin marks the end of the banking industry, but as more events like the demise of Silicon Valley Bank happen, it sheds more light on the fact that banks are not immune to risk and alternative options are available.

The beginning of a new rally?

The fallout of Silicon Valley Bank is remarkably scary when you consider that almost 10 years ago to this day, a similar scenario unfolded and Bitcoin skyrocketed. In March 2013, the banks in the country of Cyprus went through their own crisis and then had to be bailed out of the EU As more people became aware of the reality surrounding the banks, Bitcoin flourished and reached its biggest price increase ever. In just one month, Bitcoin rose from $45 to $230, an increase of 400%.

Although the scale of the Cyprus disaster was more drastic, the similarities between the two situations are still palpable. Whether Bitcoin follows the same path as it did a decade ago remains unknown, but of greater importance is the long-term potential of the world’s first cryptocurrency as more people realize that their money may actually be safer in Bitcoin than your average bank.