Adoption and nerves — Crypto pumps amid banking crisis

On March 19, the United States Federal Reserve announced that it had entered a joint program with several major central banks — including the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank — to support U.S. dollar cash flow and alleviate strains in global funding markets. 

Moreover, Fed Chair Jerome Powell said swap lines — agreements between two or more central banks to maintain a crucial liquidity backstop and ease strains in global funding markets — will remain active until at least the end of April.

This could result in the Federal Reserve slowing its rate hikes, which have been cited as a contributing factor to the ongoing banking crisis.

Since the beginning of March 2023, several major financial entities, including Silvergate Bank, Silicon Valley Bank (SVB), Signature Bank and Credit Suisse, have collapsed.

Despite these developments, Bitcoin (BTC) has rallied, reaching a high of $28,500 on March 24, its highest level since the crypto crash of June 2022. After a slump in March, where the flagship cryptocurrency dropped below $20,000, Bitcoin seems to have resumed its 2023 rally.

Since January, when Bitcoin traded at around $16,500, the digital asset has gained an impressive 72.73%. Of the roughly 4,600 days of Bitcoin as a tradable asset, investors have experienced 4,065 profitable days, challenging the instability-driven narrative surrounding the crypto ecosystem.

The banking crisis explained

In recent weeks, the global banking industry has been rocked by a slew of events, sending shockwaves through financial markets. In Europe, Credit Suisse collapsed and had to be “rescued” by rival bank UBS.

This development did not surprise those following Credit Suisse’s monetary and legal troubles, which have been widely reported for months.

The Swiss National Bank and the Swiss Financial Market Supervisory Authority agreed to back up Credit Suisse with an emergency loan of 50 billion francs ($54.5 billion) if necessary. UBS agreed to purchase Credit Suisse for $3.25 billion, which is less than half its market value just days before, but much higher than the initial offer of $1 billion, which Credit Suisse declined.

Meanwhile, the United States faces its own banking crisis across the Atlantic. Several banks, including SVB, Signature Bank and Silvergate Bank, have collapsed recently, prompting the Federal Reserve and the government to shore up depositors. The banks mentioned above all faced large-scale bank runs. These events typically occur when a bank loses the confidence of its customers, resulting in mass withdrawal requests.

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In response to these developments, the Fed has used the Bank Term Funding Program (BTFP) to inject additional liquidity into the banking system and cover deposits, with politicians reassuring the public that the banking system is secure. While these actions have attempted to restore confidence in the banking system and financial markets, some analysts warn they may only provide a short-term solution.

A recent study has shown that the U.S. banking system is highly vulnerable, with many banks potentially becoming technically insolvent during a bank run. Assuming the worst-case scenario of 100% uninsured deposits withdrawn, the study’s authors note that over 1,600 U.S. banks could collapse overnight. What’s even more head-scratching is the researchers suggest that even if just 30% of uninsured deposits were to be withdrawn, 106 banks would collapse.

The numbers seem to be in favor of crypto

Bitcoin has been on a roll, gaining more than 13% over the past week and trading at $28,430 at the time of writing. The troubles facing the traditional banking system have raised concerns about trust in traditional assets, with more money seeming to flow into Bitcoin. According to data from Coinglass, open interest in Bitcoin futures reached $12 billion over the weekend, a yearly high pointing to renewed interest in the flagship cryptocurrency.

Bitcoin open interest refers to the total number of outstanding positions in Bitcoin futures contracts that have not been closed or settled. It is a measure of market activity and interest in Bitcoin futures trading. When open interest is high, it suggests a lot of investor interest in BTC and vice versa.

Meanwhile, most altcoins are also experiencing a pump, with most of the top ten cryptocurrencies by market cap — XRP (XRP), Cardano (ADA), Ether (ETH), Solana (SOL) and Litecoin (LTC) — posting gains of 5–20% in the past week.

The renewed interest in crypto comes amid growing concerns over inflation, increasing global debt levels, and the unprecedented monetary and fiscal policies adopted by central banks and governments worldwide.

What lies ahead for crypto?

With the ongoing fiscal momentum surrounding the crypto sector showing no signs of abating, $30,000 has continued to serve as a significant hurdle for Bitcoin. However, if the digital asset approached or breached this level, many bulls could rake in short-term profits for themselves, potentially causing the cryptocurrency to dip again.

In an interview with Barron’s, Alex Thorn, head of research at digital asset group Galaxy, said we could be witnessing a seminal moment for Bitcoin. He believes that as the fractionally reserved banking system teeters on the brink, “Bitcoin’s resilience, predictability, and relative safety stands in stark relief.”

Moreover, the Crypto Fear & Greed Index hit its highest index score this year, recording 66 on March 20. These levels have not been seen since Bitcoin posted its all-time high in November 2021. As of March 24, the index is sitting on a rating of 61, placing it firmly in the “Greed” territory.

The Crypto Fear and Greed Index aims to numerically present the current “emotions and sentiments” toward Bitcoin and the cryptocurrency market, with the highest score being 100. The last time the index recorded a score above 66 was on Nov. 16, 2021, just days after Bitcoin’s all-time high of $69,000.

Chris Bradbury, CEO of decentralized finance platform Oasis.app and former lead product manager for MakerDAO, told Cointelegraph the latest rally is related to banking collapses and the broader fear in the U.S. and European banking sector, which saw vast amounts of value wiped out of bank stocks. He added:

“It’s unlikely we will see a sustained rally directly from this; however, we have started to see activity on-chain picking back up since the start of the year and a little bit more optimism more generally in the markets.”

Other observers of the crypto space think the recent pump is explained by factors that are less generous to the hypothesis of crypto as a safe haven and alternative to the traditional financial system.

Crypto researcher and software engineer Molly White recently noted that, among other things, Bitcoin is experiencing low liquidity and could also serve as an exit for traders nervous about stablecoins. As USD Coin (USDC)-to-dollar off-ramps were limited early in the banking crisis, many decided to move to different crypto assets like Bitcoin, White argued.

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She further stated that influential people stand to benefit from an increased Bitcoin price. Ex-Coinbase chief technology officer Balaji Srinivasan made a $2 million bet that Bitcoin will hit $1 million in the next 90 days based on a belief that incoming liquidity from the Fed will “hyperinflate the dollar.”

As White posited, “If he owns a lot of Bitcoin already, or has OTM [out of the money] long positions, $3 million (counting the two bets plus the $1 million in tweet payments) would be a small price to pay if he can get BTC to tick up a few percentage points.”

As we head into a future plagued by growing financial uncertainty, it will be interesting to observe how the crypto market wades through the macroeconomic uncertainty permeating the global economy.