A ‘crypto rally’ was one of the immediate consequences following the collapse of Silicon Valley Bank (10 March 2023) as the price of Bitcoin rose steeply.
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 – decentralised payment technology designed to eliminate the need for centralised trust,” he said. “So naturally when contagion spreads among big banks, their headwind can become crypto’s tailwind.”
The founding principle behind Bitcoin was giving the citizen greater control over their money through a decentralised system. In fact, the first block in the Bitcoin blockchain – which is 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 being tightly intertwined with the world’s banking systems and a deliberate snub to the centralised nature of banking systems.
However, if the rally continues, Muru imagines that the rationale for institutional investors will be that they view Bitcoin as a temporary, short-term safety measure to limit exposure to deposit risk from banks.
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“I don’t see it being an end to the crypto winter,” said Muru, 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 risk-on trading and plummeted the crypto market cap.
“Seems awfully convenient to now call Bitcoin a ‘safe-haven’ asset because interest rate hikes hit centralised banks in a comparatively worse way,” said Muru.
In addition, the crypto ecosystem has an investor confidence crisis of its own following the collapse of one of the world’s biggest 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 towards top-tier multi-national corporate banks. In the US, JPMorgan, Bank of America, Citibank and Wells Fargo have much to gain from loss of confidence in smaller, regional banks.
“In terms of the wider sector there will be a flight to quality as bigger banks soak up deposits and credit will be less available and only extended to low-risk borrowers,” said Stephen Walker, GlobalData fintech thematic analyst.