Silicon Valley Bank (SVB) failed on March 10, and since then the price of bitcoin (BTC) has been on a tear.
In the early hours of March 10, bitcoin was trading around $19,600. It whipsawed just above and below $20,000 until around 12 p.m. ET when it was announced that SVB was going into FDIC receivership. At that point, bitcoin shed $200 to dip below $20,000, jumped around a bit and spent most of the weekend trading above $20,000.
By Monday, March 13 at 9:30 a.m. ET it was trading at $22,386. And then the fun began. Just 24 hours later, bitcoin was trading at $26,175, at one point even touching up against $26,500. As of publication, it is currently sitting around $26,700.
I’ve maintained (here and here and probably elsewhere) that narrative matters a lot when it comes to the price of assets. If you don’t believe me, you could ask Federal Reserve Chair Jerome Powell, who said that “people’s expectations of inflation have a real effect on inflation.”
So what happened to the narrative to lead to this type of aggressive 35% trough-to-peak change? It’s simple, really: A lot happened.
On one hand, the bank failures
Given Bitcoin’s history, the bank failure adjacency is obvious here: At least three banks have failed, others – both American and non-American – are failing. Because it’s not because of Bitcoin, that’s good for bitcoin’s price.
Actually, it isn’t clear who is at fault for the three bank failures, because who even knows if these banks are failing due to insolvency?
Sure, SVB failed due to an old-fashioned bank run that was spurred on due to apparent weaknesses on its balance sheet because of poor duration risk management. And, yes, Silvergate was running into some issues and had to take an FHLB Loan, but its eventual winding down was reportedly voluntary. And then we have Signature Bank, where even the regulators can’t figure out if the bank was shut down because of crypto or because of a “crisis of confidence” in leadership.
Let’s add on the fact that there are wider risks to the broader banking system. Credit Suisse (CS) just received a 50 billion Swiss franc loan from the Swiss central bank, and 11 banks just injected $30 billion into California-based regional bank First Republic Bank (FRC) in order to save it.
On the former, it is telling that the central bank wants to save Credit Suisse. On the latter, it is even more telling that banks want to save a competitor for fear of contagion. (Otherwise, why wouldn’t they just let a competitor fail?)
That all said, we know one thing that isn’t causing these banks to fail. These banks aren’t in trouble because of bets on bitcoin, crypto or the companies in those industries. What appears to be happening is the fractional reserve banking system is under stress due to rising interest rates, and it’s showing cracks.
And so the narrative goes: As the banks fail, opt out and buy bitcoin. That narrative is strong enough to propel the price.
On the other hand, stablecoins were unstable
With the failure of Signature Bank, we saw U.S. dollar stablecoin USD coin (USDC) lose its dollar peg last weekend. USDC regained its peg during the week, but the loss of the peg rightly spooked a lot of people. To USDC’s credit, it is worth considering how rapid its recovery back to $1 was. That said, its depeg did highlight that USDC is not immune from counterparty risk, as some may have erroneously thought.
So if we establish that both USDC and the dollars in a bank account have counterparty risk, you might ask yourself: “Is there anything without counterparty risk?”
Well, yes, there is with bitcoin.
A related stablecoin story also came into play with the world’s largest crypto exchange by trading volume, Binance, converting $1 billion of U.S. dollar stablecoin Binance USD (BUSD) to bitcoin, ether and other cryptocurrencies in the early hours of March 13. The conversion came as a result of Binance-rival crypto exchange Coinbase officially shuttering BUSD trading on its platform due to “liquidity concerns.”
Binance’s sale not only added to the buying pressure, but also could have potentially led to a “follow the leader” effect in which people also exchanged their BUSD for bitcoin.
And if I had another hand, the US Federal Reserve
It looks like we might have a suspension of interest rate hikes from the U.S. Federal Reserve, which would give the entire market a well-needed breather, especially as some (myself included) view the failure of these banks as being closely tied to the raising of rates by a multiple of almost 20 over the last year.
From CoinDesk’s Jocelyn Yang:
Of course, that’s just the market hopping on the narrative that the rate hike might not be as high as previously expected. There has been no indication from the Fed that this will be the case. There goes that “narrative and expectation” again.
Lastly: I keep saying bitcoin, but don’t I mean crypto?
No, I don’t mean crypto. I mean bitcoin.
Amid all the market turbulence, bitcoin’s price is going up faster than even the much smaller and often more volatile altcoins. We see that with bitcoin dominance, a measure that looks at bitcoin’s market capitalization compared to the rest of the cryptocurrency market, which reached a nine-month high at 45.5% on Wednesday.
So in all: There’s systemic global bank risk, stablecoins in crypto proved they need those banks to be stable, and amid all the general angst the Federal Reserve may be pulling back on rate hikes. All that has added up to bitcoin swinging up massively over the last week.
That continues is anybody’s guess. To be sure, uncertainty is never cause for celebration because of its potential negative consequences on people’s lives. But for the time being, bitcoin, with its fixed issuance at a time of monetary expansion, looks like a way to opt out of this most recent crisis.
Maybe it is.