Financial institutions linked to the crypto industry have had a difficult few weeks. Silvergate, one of the leading providers of banking services for crypto businesses, collapsed. Silicon Valley Bank, favorite of technology startupsit failed and was taken over by the federal government, as was Signature Bank in New York, which went from supporting cab companies and Trump companies to, you guessed it, crypto.
However, crypto markets have has been increasing for the past week, with the trade value of Bitcoin one of the biggest gainers, jumping 14 percent to around $24,700 since Silvergate closed. What is happening?
Experts say there are several reasons why cryptocurrencies appear to be defying the prevailing financial pessimism at the moment, including a bet that the Federal Reserve Bank will cut its interest rate hikes. Another important factor is that the recent bank failures present the exact situation that cryptocurrencies have long been touted as a solution for: an opaque banking system where you may not be able to access all your money if one bank fails, since Federal Deposit Insurance Corporation insurance covers $250,000 per depositor, per bank.
By contrast, cryptocurrencies like Bitcoin are part of a decentralized financial system. While cryptocurrencies and banks are not backed by federal deposit insurance like traditional banks are, they are not fundamentally beholden to any government either. When crypto scams fall apart or projects collapse, investors have no clear recourse to get their money back. Still, ongoing problems with the traditional financial system have convinced cryptocurrency promoters that this is cryptocurrency's "time to shine."
โBitcoin's strong performance in recent days is largely driven by macroeconomic factors, specifically rising expectations of a US interest rate cut in the coming months,โ said Noelle Acheson, author of the newsletter. Crypto is Macro Now and former director. of market insights at Genesis Trading, a digital asset financial services company. "This tends to favor assets with relatively high volatility, as lower rates mean easier credit, which in turn means more money looking for higher yields."
While stocks and bonds would normally fall into that category, he said, โthe worsening economic outlook means they are likely to be hit by earnings downgrades and credit concerns. Bitcoin, on the other hand, has no profit and you don't have to worry about credit either."
Cryptocurrencies respond to liquidity and central banks
The current comeback of Crypto follows a historical pattern. During previous banking crises, such as the bankruptcy of several banks in Cyprus in 2013, in which depositors lost billions of dollars, crypto markets reacted positively. In March 2013, the month the Cyprus bank runs began, Bitcoin's value rose 178 percent, to $93, before setting a May record of around $250.
(The pandemic saw a departure from this pattern, with crypto more closely following the boom and bust of the stock market during the first two years of the covid crisis.)
โI've always thought this is an interesting thing: Anytime people get nervous about how the banking system works in general, especially if it means the bank or the government can restrict access to deposits, then Bitcoin steps in. price,โ said Omid Malekan, an adjunct professor at Columbia Business School who teaches courses on cryptography and blockchain. โBecause it is censorship resistant, no one can deny anyone access. And while the price can fluctuate, if you can't get access to your dollars at a bank that's closed, what value are those dollars anyway?
Malekan was quick to point out that the price of gold also rose, perhaps in the expectation that the Federal Reserve could lower interest rates to mitigate the impacts of the recent US banking collapses.
Crypto responds to financial scares
During the early years of the pandemic, Malekan said, there was so much money printing and economic stimulus money at stake that inflation fears grew and the price of cryptocurrency rose. Over the past year, the Federal Reserve and other central banks have raised interest rates, tightening liquidity to control inflation, reducing the attractiveness of Bitcoin. But that seems to be changing with the new stress in financial markets in general.
โThe anticipation now is that this banking crisis that started last week will force the Fed to stop tightening and possibly start easing again,โ Malekan said.
Acheson echoed this. He also argued that recent bank failures have highlighted the opacity and fragility of the traditional banking system, which is likely to encourage some people to think more deeply about the potential benefit of an alternative financial network.
โHowever, this is more of a longer-term shift, supported by skyrocketing inflation in some countries, as well as building geopolitical tensions and a growing awareness of the need for seizure-resistant stores of value,โ Acheson said. . "In the shorter term, a looser monetary environment favors risk assets, and we are likely to see continued inflows from macro investors."
And this is an opportunity for cryptocurrencies to reiterate their core value proposition, as proponents were quick to do. Instead of relying on centralized authorities and government bodies to enforce things, you can enforce them through a transparent code, according to sunny aggarwalco-founder of Osmosis Labs, a decentralized crypto exchange.
โCode can enforce the rules, while governments can't magically enforce the rules. All they can do is punish or enforce after the fact," Aggarwal said. "But that doesn't help when you know your money is gone, right?"
The double-edged crypto sword
But cryptocurrencies, to be fair, can work both ways. If you tend to be โself-sovereignโ with your finances, you don't risk losing assets beyond the FDIC's $250,000 limit in the event of a bank failure. At the same time, there is no one to help if a cryptocurrency evaporates, since the algorithmic Terra stablecoin did last year, leaving people with little or nothing.
Mark Lurie, CEO of Shipyard Software, said the only reason the traditional banking system needs to save regularly is because it's a fractional reserve system, where banks lend more than they take in.
โThis is a social construct that is only viable because the government licenses banks to effectively print money,โ Lurie said. โIn crypto, the loans are overcollateralized so there is no need for the government to step in if a coin goes down because a bank run would just drain the bank without creating contagion. Whether you see it as a worthwhile trade-off has a lot to do with whether you're a crypto purist."
Crypto advocates were also quick to point out that the industry still needs time to develop, even after the collapse of multi-billion dollar institutions like FTX.
"This is what happened with Linux, a toy operating system that for years many people couldn't even imagine was a threat to commercial alternatives, but now runs much of the Internet and is incredibly secure, fast, and reliable." said. barney mannersco-founder of vega Protocol, a derivative trading and scaling layer for Web3 applications.
Going into crypto, he said, offers the same risk as being an early venture capitalist or angel investor: You can thrive and disrupt an industry, or you can go bust.
"The real risks are in centralized crypto services," Mannerings said. โThese have all the risks of centralized finance and more, but they have no real oversight. They are truly the worst of both worlds. When it comes to early-stage projects and coins, which is pretty much everyone right now, people need to be realistic about what they're getting themselves into.โ
Correction
An earlier version of this article incorrectly expressed the title of Mark Lurie. This version has been corrected.
Thanks to Lillian Barkley for editing this article.
