Bitcoin was built was for this moment

by Arthur · March 13, 2023

The failures of Silicon Valley Bank, Silvergate Bank and Signature Bank continue to ripple through markets, sending US bank stocks tumbling. Most recently, Charles Schwab’s stock was halted in trading on Monday morning. Meanwhile, bitcoin and the rest of the cryptocurrency market are experiencing a double-digit rally, which may be the first time bitcoin has rallied in a risk-off environment. Perhaps this is exactly the moment bitcoin was built for.

Tatiana Koffman is an angel investor, author and creator of the weekly newsletter MythOfMoney.com.

The Bitcoin network was created as a direct response to the Great Financial Crisis of 2008, at a time when many hard-working people felt that both the government and the financial system were working against them. In fact, the very first block of Bitcoin had an inscription in the code: “The Times 03/Jan/2009 Chancellor on the brink of the second bailout for banks.”

As regulators prepare to shut down another centralized financial institution, which collapsed in part due to aggressive Federal Reserve monetary policy and what appears to be either poor risk management or greed, it is important to heed Satoshi Nakamoto’s message.

For years I’ve talked about the “Great Reset,” a concept that advocates that we stop trusting centralized institutions with the things that matter most. After all, these institutions are run by people who are not necessarily better or smarter than us, but they make all the decisions and mistakes for us.

If we look at the course of events of the past week, we quickly begin to recognize the flaws of human centralization. Last Wednesday, central bank governor Powell outlined a new approach to the central bank’s policy path, which indicates that interest rates may continue to rise for a longer period than previously expected. The expectation of higher interest rates over an extended period almost immediately sent a ripple effect through the bond market, causing bond prices to fall drastically because prices move in the opposite direction to interest rates.

At the same time, Silicon Valley Bank was forced to sell some of the 10-year bonds on its balance sheet at a 20%-30% discount to meet its obligations amid a period of rising withdrawals. As rumors of a cash shortage began to circulate, a full-on run on the bank ensued and regulators took over. This led to even more panic.

Can all regional banks fail? After all, under shared banking rules, most of these banks only hold 5-10% of your capital in reserves, leaving each bank vulnerable to a bank run.

And then there was the obvious question of who headed the risk management department who decided it was okay to buy 10-year securities for an institution that has daily cash flow obligations to its depositors.

When the current economic downturn began last year, many worried that crypto failures, such as those at FTX, Three Arrows Capital, and Terraform Labs, would spread to traditional finance. But the exact opposite happened because the Silicon Valley Bank failure directly affected the stablecoin market.

USDC, the second largest US dollar-pegged stablecoin after USDT, is powered by Circle. Circle’s model is simple – it takes your money and gives you a digital voucher called USDC. It then takes your money and invests it in super-liquid three-month US Treasuries (currently yielding 4.87%). What could be safer?

Well, Circle reasonably decided it should still have some cash on hand and spread it among six different banking partners, one of which is Silicon Valley Bank. As SVB began to fail, Circle announced that it had deposited $3.3 billion with SVB, creating an over 5% hole in its balance sheet.

Panic ensued as the USDC lost its dollar peg and fell below 87 cents on Saturday. Traders quickly switched to tether, the largest USD stablecoin, although questions have been raised about the issuer’s business practices and reserves. I personally chose to move a large portion of my holdings to bitcoin, apparently like many.

The depegging of USDC is significant because Circle, considered a highly regulated and safe business, was ready to go public as a separate entity. The incident provided a wake-up call to investors, demonstrating that “not your keys, not your coins” applies not only to banks, but to all centralized entities, including those that operate our stablecoins.

Circle tried to restore confidence by announcing that it will use its corporate resources to cover any shortfall, prompting the stablecoin market to rebound on Sunday night. As a result, USDC and DAI (which hold significant USDC reserves) have reverted to their dollar peg and it is expected that USDC will now trade at par after compensating SVB depositors. But is that enough?

Our possessions may return, but the shock to our nervous system remains. How can we trust something centralized? How can we keep our money in banks above the FDIC insured limit of $250,000? Can the insurance fail? How can we keep our money in stablecoins using the same banking partners?

Bitcoin’s beauty lies in its ability to store value in a decentralized way supported by mathematics, without requiring humans to validate or support it. No one lends out 90% of your deposits to make money, there is no possibility of bank runs and no one gambles your hard earned money on bonds.