Bitcoin Versus Banks – The Irrelevant Investor

by James · March 25, 2023

Something happened in crypto this week that has never happened before. It acted as a safe haven.

Before the last period, every time the market fell, Bitcoin fell more. A few examples below:

From January 2018 to April 2018, the S&P 500 fell 10%. Bitcoin fell 35% at the same time.
From September to December 2018, the S&P 500 fell 20%. Bitcoin fell 43% at the same time.
From February to March 2020, the S&P 500 fell 34%. Bitcoin fell 54% at the same time.
From January 2022 to October 2022, the S&P 500 fell 25%. Bitcoin fell 60% at the same time.

I fully understand that today’s market does not look like the previous episodes above. In fact, the S&P 500 is down less than 1% since March 9 when we first learned of SVB’s problems. The risk I am talking about was limited to a very specific and important area of the market, the banks.

Last week, Bitcoin outperformed XLF by 40% over a seven-day period. And it did so while XLF was in a 20% drawdown. The only other time that happened was after the Covid bottom in March 2020, which is not like today. Before the bottom, Bitcoin was cut in half in a single day. And then it went back, leading to 40% better performance. In no way shape or form was the same thing we saw last week.

I’m more of a crypto-believer than most in traditional finance, but I’m hardly a zealot. The comments I am about to make are not from anyone who lives or dies with crypto success or failure. With that out of the way, I think the recent move makes sense if you think of this through human nature.

Crypto was born in the ashes of a financial crisis. It was inspired by the lack of trust in financial institutions. With the blockchain, everything could be verified in real time. These are my coins and I can prove it. I can move them whenever I want to whomever I want instantly, at almost no cost, and no one can stop me from doing so.

The attractiveness of such a system became much more attractive after the events of the last couple of weeks. Silicon Valley Bank was a top 20 bank in the US. And then a few people shouted fire and all the customers ran out the door. Or, enough people that the bank had to be taken over. And then the same thing happened in Signature Bank. And Silvergate. And Credit Suisse. And who knows how many others may be in trouble?

Yes, Bitcoin is volatile, but at least I know it’s mine. I don’t have to worry about the authorities stepping in (or not) to stop me the way I do if I’m in a bank that people don’t trust.

“You don’t think your money is safe at JP Morgan?!?!?!?!”

Of course I do. But Bitcoin is not native to the United States. Imagine you are in a country that has a banking system that is prone to failure? Or a government that has the ability to seize assets? In such places, Bitcoin just became more than a speculative asset. It was money.