Bitcoin emerges and continues 2023 gains as banking sector struggles with SVB failure
Bitcoin oneOther cryptocurrencies had the opposite reaction to the news of Silicon Valley Bank’s collapse than traditional stocks: They actually rose.
The pop continued bitcoin’s generally positive growth this year, contributing to the digital asset’s positive performance against other investments. Experts do not assign just one reason for the growth, but rather attribute the rise to several factors.
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The Federal Deposit Insurance Corporation announced Friday that Silicon Valley Bank, known as SVB, had failed and been taken into government hands. The move prompted some to speculate about a bank run, with regulators also shutting down major crypto lender Signature Bank on Sunday.
Officials gave assurances the weekend before markets reopened that all depositors would be made whole. The federal government announced that it would support all deposits in the banks, even those exceeding the FDIC’s $250,000 threshold, and the Federal Reserve rolled out a new source of funding for banks that might be exposed to runs by depositors, called the Bank Term Funding Program.
But bitcoin quickly recovered as the banking sector struggled with SVB’s fallout.
On the Wednesday after the collapse, bitcoin flirted with the key $25,000 mark. It was the same day that Swiss megabank Credit Suisse began to fall and other regional US banks saw their credit ratings reviewed.
The flagship cryptocurrency even reached as high as $26,400 the previous day, a massive 34% increase from before SVB’s implosion on Friday. Ethereum had similar gains, hitting $1,780 earlier on Tuesday – 29% higher than Friday’s low.
David Sacco, an instructor of finance and economics at the University of New Haven’s Pompea College of Business, pointed out Washington Examiner that for most of the past year and a half, crypto has largely tracked other risk assets, meaning it had not performed well in 2022.
Cryptocurrencies began to fall dramatically in the spring and summer of last year when the Fed first started raising interest rates. Higher prices generally reduce the value of risk assets such as stocks and, as the past year has shown, digital tokens.
In downturns, investors typically flee risky investments in favor of safer and more stable stores of value. Bitcoin and other cryptocurrencies are still a growing asset class, and some of the declines seen last year occurred because crypto holders sold off their holdings in fear of a crash, resulting in a chain reaction effect.
This time, bitcoin and other major cryptocurrencies are moving in the opposite direction than one might suspect. Sacco said that over the past year, cryptocurrency has performed in a way that drove away risk-averse investors, but perhaps the recent exposure of risk in the banking system has changed that a bit.
There is also the question of the fundamentals of bitcoin and cryptocurrency. Proponents argue that the underlying blockchain technology offers a safe haven for investors skeptical of the banking system and government ties.
“If you think about the role that crypto could one day play, it’s kind of an alternative to government-controlled currencies and monetary systems,” Sacco said. “I think it’s a little bit of that – here’s a reason why crypto might gain some traction one day if people start to lose confidence in banking systems.”
John Berlau, senior fellow and director of fiscal policy at the Competitive Enterprise Institute, said Washington Examiner that some investors may view bitcoin similarly to investments such as gold, which typically rise in value when the banking sector is on shaky ground.
“It has many of the properties of a precious metal, plus it’s in a convenient digital form, and so it turns out to outlive the institutions that serve it … as a form of currency and with the blockchain technology that it carries,” Berlau said.
Gold prices rose somewhat after SVB’s failure. Gold futures were nearly 6% in the days after SVB’s collapse, growth that still lagged behind bitcoin and some other cryptocurrencies.
It’s also worth noting that bitcoin already had a pretty good year. On New Year’s Day, bitcoin traded around $16,500 and was generally below $17,000 most of the time following crypto firm FTX’s dramatic implosion in mid-November. But since then, bitcoin has gained an astonishing more than 47%. Ethereum, the second largest cryptocurrency, has increased by almost 40% in the same period.
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Investors will be watching the saga of the banking sector closely. Some cryptocurrency experts predict that if the rout continues, it could continue to prove a boon for bitcoin and other digital assets.
“I think to the extent that the banking crisis story continues to have legs, I suspect it’s going to be good for crypto, but again, it’s a new trading pattern, so we’ll see what happens,” Sacco said, noting that another test for the trading pattern is that if bank stocks recover and start to decline again, crypto would be expected to decline.