Yuichiro Chino
- Bitcoin is having a "watershed moment" thanks to the ongoing banking crisis, an analyst told Insider.
- The cryptocurrency has surged nearly 40% since early March when SVB's collapse unleashed mayhem in the banking system.
- Here's 3 reasons why bitcoin is reigning supreme in a time of financial-sector turbulence.
Banks are imploding, the traditional financial system is on wobbly ground, and fears of a 2008-style crisis have come into play.
That's good news for some.
As global markets still recover from the shock of this month's US bank collapses – Silvergate Capital, Silicon Valley Bank, Signature Bank – and a government-backed rescue of Credit Suisse in Europe, bitcoin has come out on top.
The world's largest cryptocurrency is enjoying its best quarter in two years, soaring almost 70% since end-December and hitting a nine-month high just shy of $29,000 last week. It has jumped almost 40% since early March when the banking crisis erupted, riding digital assets' image as a futuristic alternative to traditional finance.
"This is a watershed moment in bitcoin's history and adoption is likely to accelerate from here, particularly if it continues to decouple from financial markets and prove its resiliency in times of market stress," Lucy Gazmararian, crypto expert and founder of Token Bay Capital told Insider.
The rally comes after a painful 2022, which saw bitcoin lose almost two-thirds of its value as the Federal Reserve's aggressive interest rate hikes, recession fears, and more recently, the shocking failure of industry darling FTX all undermined investor sentiment.
For many crypto enthusiasts, the surge in digital assets at a time of turmoil for other financial assets is a reason to gloat. "This is our time!! Let's go team $BTC!! [...] "The decentralized revolution is happening," said Galaxy Digital CEO Mike Novogratz in a tweet.
But of course, not everyone is on the same page. Wharton professor Jeremy Siegel said the rally in bitcoin is set to fizzle out once people start trusting banks again.
All this is to ask in the first place: Why is bitcoin shining in the middle of global banking turmoil?
Safety from banking stress
The banking crisis has triggered panic and mistrust among investors about the broader financial system. That's because it's revealed that the money people deposit in banks is the institution's money as much as their own.
Banks use customer deposits to extend loans or invest in yielding assets like bonds. But such investments can end in losses, as was the case with Silicon Valley Bank's bond portfolio. That has made depositors nervous about the safety of their money – should their bank's transactions prove unsuccessful.
That's where bitcoin's benefits come in. The cryptocurrency is a decentralized asset, meaning it's not controlled by an external body. And from that rises its appeal as a safer asset in times of banking stress, when the financial system is prone to counterparty risk.
"We are likely to see increased institutional interest in the asset given its "safe haven" status during times of market stress," Gazmararian said.
Interest-rate outlook
The recent financial turmoil has renewed investor hopes that the Fed will ease up on its monetary policy, especially because some of the bank collapses stemmed from the aggressive rate hikes of the past year.
Those expectations were vindicated at the central bank's Wednesday meeting, when policymakers raised the benchmark rate by 25 basis points instead of 50 basis points traders expected at the start of March. Fed chair Jerome Powell also acknowledged that if credit flows slow across the broader financial system as a fallout of the banking turbulence, then the central bank may not have to be so tight with its monetary policy.
Lenders have been making it harder for borrowers to access credit amid the global banking panic, which has a similar effect on economic activity as an increase in interest rates – effectively banks are doing the Fed policymakers' job for them.
Should the central bank opt to loosen its policy, that would be positive for crypto assets. Monetary easing means lower borrowing costs - and that would give investors more disposable funds to plow into risky assets such as bitcoin and stocks.
More cash in the financial system
In the wake of the recent financial-sector turbulence, the Fed has taken steps to pump more cash into the financial system in order to prevent more bank runs.
For example, it has created an emergency loan mechanism dubbed the Bank Term Funding Program that will allow banks to raise cash by putting up their bond holdings as collateral.
That too works in bitcoin's favor - an increase in financial liquidity can add to the appeal of digital assets that are limited in supply, relative to traditional fiat currencies like the US dollar. As the law of supply and demand commands, adding money to the financial system reduces the dollar's value simply because it becomes more easily available.
Bitcoin's supply is finite. There will only be 21 million bitcoins in existence once the last one is mined 118 years from now – meaning it is less likely to fall in value by central bank manipulation.