Will crypto rally end the crypto winter? Investment monitor
A “crypto rally” was one of the immediate consequences of the collapse of Silicon Valley Bank (March 10, 2023) when the price of Bitcoin skyrocketed.
Bitcoin rose from $20,447 on the morning of the bank’s collapse, climbing steadily to $27,818 at the time of writing.
The driving force behind the Bitcoin rally is far more theoretical than practical, according to GlobalData thematic research analyst Suneet Muru.
“The original purpose of Bitcoin was to be an alternative to fractional reserve banking – decentralized payment technology designed to eliminate the need for centralized trust,” he said. “So naturally as contagion spreads among big banks, their headwind can become crypto’s tailwind.”
The basic principle behind Bitcoin was to give the citizen greater control over their money through a decentralized system. In fact, the first block of the Bitcoin blockchain – called the genesis block – contains the following text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” – a reference to political systems that are closely intertwined with the world’s banking systems and a conscious rejection of the centralized nature of banking systems.
But if the rally continues, Muru envisions that the rationale for institutional investors will be that they see Bitcoin as a temporary, short-term safety measure to limit exposure to deposit risk from banks.
“I don’t see an end to the crypto winter,” Muru said, adding that the consensus within the cryptocurrency ecosystem is that a high interest rate environment was the first domino in the crypto winter because it killed the risk of trading and dropped the crypto market cap.
“It seems very convenient to now call Bitcoin a ‘safe haven’ asset because interest rate hikes hit centralized banks relatively worse,” Muru said.
In addition, the crypto ecosystem has its own crisis of confidence for investors following the collapse of one of the world’s largest crypto exchanges, FTX. In March 2023, Silvergate, a lender to crypto companies including FTX, announced bankruptcy.
The long-term beneficiaries of this regional banking volatility – particularly in the US – will be larger, trusted institutions and not the cryptocurrency industry.
Reports have emerged of a rush to safety by investors against top tier multinational corporate banks. In the US, JPMorgan, Bank of America, Citibank and Wells Fargo have much to gain from the loss of confidence in smaller, regional banks.
“In terms of the wider sector, there will be a flight to quality as larger banks soak up deposits and credit will be less available and only extended to low-risk borrowers,” said Stephen Walker, GlobalData fintech thematic analyst.
