Just when it looked like the cryptocurrency market had begun its long-awaited recovery, it fell again last weekend, and hard. In fact, it fell so sharply that its total limit as a whole fell by 7% in one day and 13.5% in a week, with bitcoin (BTC) falling as much as 16% in the seven days to Friday. The short-term trigger was the news that Silicon Valley Bank had collapsed, just days after fellow crypto-friendly bank Silvergate announced its voluntary liquidation.
However, the fall of SVB is just one of many factors that are undermining the market right now, with continued interest rate hikes and threats of strict regulation playing a significant role.
The fact that Silvergate, Silicon Valley and now even a third bank – Signature – could collapse in such a short space of time indicates how far the global economy is from a full and stable recovery. Indeed, with financial institutions suggesting last week that the Federal Reserve may actually raise its rate hikes this year, it’s clear that the cryptocurrency market is far from achieving the kind of solid economic foundation it would need for a new bull market.
And with the Biden administration outlining a 30% tax on cryptocurrency mining in its latest budget, the market may have to withstand a few more months of last year’s crypto winter before seeing a real recovery. That said, bitcoin (BTC) saw a big rally on Monday amid growing concerns about bank stocks, suggesting that a loss of confidence in the financial system could actually end up helping cryptocurrencies (or at least some cryptocurrencies) more than it hinders them.
Another banking crisis
The respective disappearances of Silicon Valley Bank and Signature Bank were of a slightly different nature from that of Silvergate Bank, as both were effectively closed by US regulators (placed in receivership). However, just like Silvergate, SVB suffered a series of withdrawals, forcing it to sell various assets it held at a substantial loss, while an attempt to raise money by selling additional shares failed (as did an attempt to put itself up for sale). Similarly, Signature Bank has also suffered a large wave of withdrawals from customers, with its run fueled by concerns stemming from previous failures of SVB and Silvergate.
The fun doesn’t stop there, though, as other banks have found themselves in trouble in recent days. This includes First Republic, which has seen its stock price plummet as investors become increasingly fearful and risk-averse. And to a significant extent, it also includes a number of other U.S. banks, with even the largest financial institutions in America (and around the world) seeing their shares take a beating.
A big part of the reason banks are facing a crisis right now is that so many of them are sitting on (large) unrealized losses. According to data compiled by Bloomberg, they are currently stuck with bond losses of around $600 billion, and if more of them are faced with runs, they too could be forced to realize those losses.
And the reason the bonds (and mortgage-backed securities) they hold have lost so much value is because of the Federal Reserve, which has been on a mission for the past 12 months or so to raise interest rates. The fact is that when a central bank raises rates, it tends to make holding bonds less attractive, particularly if rates rise above the yields offered by bonds.
This is exactly what is happening to the US (and Western) banking system right now, forcing the Federal Reserve, the US Treasury and other bodies to intervene yesterday with a package of measures to help. This includes securing customer deposits in excess of $250,000 (which FDIC does not normally do) and offering “additional funding to eligible deposit institutions” so they can meet withdrawal requests.
Rates, regulation and recovery
On a more fundamental level, what the ongoing banking crisis also indicates the poor health of the global economy, which has failed to fully recover from the Covid-19 pandemic. Inflation remains high in many developed nations, with the Federal Reserve and other central banks suggesting that further rate hikes are yet to come. For example, traders have bet that the Fed has pushed its base rate up to 6% this year (from about 4.5%), something that will only suppress the global economy for longer.
This includes the cryptocurrency market, which despite seeing some sort of mini-renaissance since the beginning of 2023 has not come close to regaining the heights of late 2021. Bitcoin rose as high as $24,972 on February 20, with a 50% gain from January 1, but its performance – as well as that of the market as a whole – was seriously detailed by the failure of Silvergate Bank, followed by the collapses of Silicon Valley Bank and Signature Bank.
And even $24.9721 is 63% lower than BTC’s all-time high of $69,044, signaling how market conditions are still muted. This is also worsened for cryptocurrencies by the threat of regulation on the way, with the Biden administration outlining a federal budget for 2024 that includes a 30% tax on electricity used to mine cryptocurrencies like Bitcoin (the news of which helped lower prices over the weekend).
In addition, recent banking and exchange failures within cryptocurrencies have increased the urgency of legislators when it comes to introducing specific cryptocurrency regulations. The EU has been calling for the fast track of cryptocurrency capital rules for banks in recent weeks, while recent months have seen the Biden administration respond to FTX’s bankruptcy and other explosions by urging Congress to introduce comprehensive legislation.
Combined with high interest rates, high inflation, and investor uncertainty, these regulatory openings highlight how the economic environment still remains unfavorable to cryptocurrency. In that context, investors are still trying to reduce risk, which means that cryptocurrencies can’t really organize a substantial return, at least not yet.
Aside from this negativity, Monday saw an interesting market reaction to various news stories regarding the ongoing banking crisis. After falling about 16% between Thursday, March 9 and Friday, March 10, bitcoin rose to $24,469 on Monday, March 13, with an 18% gain in 24 hours. Many observers took this as a sign that investors are fleeing to safer havens, with gold also rising in the wake of this latest banking drama.
While things remain in a very precarious situation, it is possible that the Fed’s intervention will prevent a real banking crisis at the 2008 level. That, at least, is the opinion of analysts, who generally predict that regulators will nip things in the bud this time.
“Unlike in 2008, the government stepped in early and intervened hard,” said Brad McMillan, chief investment officer for the Massachusetts-based Commonwealth Financial Network. “While we can certainly expect market turbulence – and we are seeing this morning – the systemic effects will be limited. We are not ready for a repeat of the Great Financial Crisis.”
While we may spare ourselves another 2008, this new banking mess will likely increase the position of Bitcoin and some other cryptocurrencies in the long run (while likely also leading the Fed to lower interest rates). This is because Bitcoin has continued to run without interruptions or interruptions since 2009, and no matter how many banks fall by the wayside in the coming weeks, it will continue to operate for many, many more years to come.
