What banking sector uncertainty could mean for crypto markets

The collapse of several banks last year highlighted bitcoin's role as an alternative asset existing outside the traditional banking segment.

But the current uncertainty around banks could have a positive or negative impact on cryptocurrency market sentiment, depending on who you ask and what happens next.

The Federal Reserve created the Bank Term Financing Program (BTFP) in March 2023, during which month Silvergate Bank revealed its intention to liquidate, Silicon Valley bank collapsed and the The FDIC closed Signature Bank.

The Federal Reserve program made funds available to eligible depository institutions in an effort to help banks meet the needs of their depositors. But it is set to arrest grant new loans on March 11.

Furthermore, several investors injected more than $1 billion of capital in New York Community Bancorp (NYCB) on Thursday. The company, which has approximately $100 billion in assets, posted a loss of $2.7 billion during the fourth quarter. Its shares had fallen to less than $2 on Wednesday, down from more than $10 in late January.

Risk in the banking sector will remain until the Federal Reserve cuts interest rates, said Ruslan Lienkha, head of markets at crypto platform YouHodler.

"Investors should monitor the situation in the banking sector at least until the middle of this year," he told Blockworks. “In the worst case scenario, a widespread banking crisis could trigger a deep correction in TradFi and also the cryptocurrency market.”

Still, most mid-sized banks are "quite far away from the cryptocurrency market," Lienkha said, noting that their main business is lending to the "real sector" of the economy.

"Speaking of NYCB, there are problems but it is too early to talk about insolvency," he added. "So I don't think the cryptocurrency market will react in any way in the near future until we get more new input."

Is banking sector instability bullish for bitcoin?

The NYCB developments came just days before the Federal Reserve's BTFP stops making new loans to eligible segment players.

The Federal Reserve basically eliminating support for smaller banks is likely to accelerate consolidation in the banking sector, according to Jeff Embry, managing partner at crypto hedge fund Globe 3 Capital.

"It is inevitable that the banking sector will become increasingly centralized around the largest 'too big to fail' banks," Embry told Blockworks. “As the banking sector becomes more centralized, we believe this will create even more demand for decentralized crypto assets.”

The Globe 3 Capital executive noted that cryptocurrencies can become a “flight to safety” asset in times of uncertainty. The price of Bitcoin rose approximately 50% in the weeks following the March 2023 banking collapse.

Read more: Bitcoin price gains momentum as 'store of value' amid banking turmoil

Samir Kerbage, chief investment officer at crypto asset manager Hashdex, said the end of the BTFP could have a slightly more nuanced impact on the crypto market.

The Hashdex executive said in a March 2023 blog. mail that banking vulnerabilities caused a “reopening” of the dangers of a “debt-laden” banking system in which customers are subject to the health of financial institutions.

“This misalignment of incentives is precisely the problem Bitcoin was created to solve,” Kerbage wrote at the time.

But if the cessation of the BTFP stimulates instability in the banking sector, it could trigger "a massive risk aversion movement" that is potentially negative for cryptocurrencies, he told Blockworks this week.

"Despite this, and similar to what we saw last year, bitcoin could react positively as investors look to exit the banking system into deposits of non-sovereign securities such as bitcoin and gold," Kerbage added. “Unlike last year, it is now much easier for US investors to access bitcoin through recently launched ETFs.”

NYCB's fundraising and suspension of new BTFP loans come amid a cryptocurrency price rally that resulted in a new all-time high for bitcoin on Tuesday.

This price increase comes as investors have shown sustained demand for US spot bitcoin ETFs approved by the Securities and Exchange Commission in January.

The next bitcoin halving, an event that occurs every four years, during which block rewards for bitcoin miners are halved from one block to the next, is scheduled for next month. Historically, these events have catalyzed bullish BTC price trends.

Read more: The next Bitcoin halving is approaching. This is what you need to know

“With newly created bitcoin spot ETFs and the upcoming bitcoin halving in April, we are seeing an absolute wall of liquidity entering bitcoin,” Embry said. "Add some banking uncertainty and you could have the perfect storm for bitcoin and cryptocurrency-related assets."

Embry noted that his company's bitcoin price prediction of $124,000 by the end of 2024 may now be too conservative.

The price of BTC was around $67,250 early Friday, up almost 9% from a week ago.
But Lienkha warned that the impact of crises on the economy can far outweigh positive internal crypto market events, such as ETF approvals or the upcoming bitcoin halving.

He added: "In my view, the cryptocurrency market can only grow in conditions of tranquility or growth of TradFi."

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