As the banking sector continues to rage, this time Credit Suisse, crypto enthusiasts are already taking victory laps on Twitter.
“The macro backdrop for Bitcoin has never been more perfect,” wrote co-founder of Mechanism Capital Andrew Kang.
Others, referring to the inscription enshrined in the network’s first block, reverberation feeling, saying “Bitcoin was made for this.”
Looking beyond the chatter, however, paints a much more complex picture, one that reveals just how intertwined Bitcoin and cryptocurrencies are with the Federal Reserve’s monetary regime.
It boils down to interest rate increases and how risky investors evaluate digital assets.
As prices rise to tame inflation, making money more expensive to borrow, investors are leaving riskier assets like stocks and cryptocurrencies for safer bets like U.S. Treasuries, which have seen their yields trend upward as the Fed tightens.
But as prices rise, they can also put pressure on the banks.
Silicon Valley Bank, for example, disclosed that it had switched to bonds with variable term maturities. However, when their tech and startup-centric client withdrew funds to expand the runway, SVB was forced to sell those bonds before they matured, resulting in a huge loss and ultimately the bank’s closure last week.
Many have criticized SVB leaders for the collapse, including President Biden. However, others have said that the pace at which the Federal Reserve is raising interest rates is also to blame.
Thus, pausing hikes will create fertile ground for high-risk assets like Bitcoin to thrive. And today’s continued banking chaos suggests that such a break may very well be on the cards.
Fat hikes on break?
The likelihood of the Federal Reserve pausing interest rate hikes rose on Wednesday as investor confidence in European banking stocks faltered.
Fed funds futures indicated a 59% chance the Fed would pause its most aggressive tightening cycle in 40 years, nearly doubling from a 31% chance the day before, according to the CME FedWatch tool.
The central bank looked set to continue raising interest rates yesterday as US banking stocks showed signs of stabilization.
But that changed when Credit Suisse’s shares plunged more than 25% on news that Saudi National Bank – the institution’s biggest lender – would not offer Credit Suisse more financial help, as reported by Reuters.
Shares in other European banks also fell over 8%, including Commerzbank, BNP Paribas and Societe Generale. In the US, major stock indexes such as the S&P 500 and the Nasdaq Composite shaved 1.5% and 1% respectively, less than an hour after markets opened amid Credit Suisse’s troubles.
Crypto’s Windy Way Out of Winter
Investors worldwide may adopt a risk-averse stance as uncertainty in financial markets continues to loom, said Wave Digital Assets CEO Nauman Sheikh Decryptwhich causes the price of risk assets such as crypto and stocks to fall in the short term.
“This is another example of a bank run that could definitely have a positive effect on crypto in the medium term, but in the short term, if the whole world is in a risk-off mode, I think [crypto] should follow downwards as well, he said.
Although the price of Bitcoin has risen 11.3% to around $24,800 at press time, the largest coin by market capitalization had fallen 4.5% over the past day, according to CoinGecko. Ethereum fell 4.6% to around $1,660, marking weekly gains of 6.3%.
Despite recent gains, Bitcoin still exhibits a significant correlation with stock indices such as the Nasdaq and the S&P 500, as Fed tightening has been a driving force behind the value of both stocks and crypto.
The recent failures of Signature and Silvergate have also raised concerns about the ability of crypto-native firms to establish banking partnerships, amid a regulatory crackdown on the digital asset industry — the New York Attorney General’s office claimed Ethereum as collateral in the cryptocurrency lawsuit. exchange KuCoin announced earlier this month.
Regardless, crypto as an asset class has shown signs of resilience amid a turbulent time in financial markets, Sheikh said.
“The crypto banks, they are few and far between now, the regulation is clearly anti-crypto, but nonetheless, crypto is holding its own,” Sheikh said. “I think it’s been remarkable how it’s performed.”
Some analysts, including James Butterfill of CoinShares, have argued that the recent surge in crypto prices is representative of investors’ growing distrust of the banking system as cracks form in the financial system.
On top of that, the idea that the Fed might pause or even cut interest rates in response to a strain on the banking sectors is good for risk assets, said ING Bank chief international economist James Knightley.
Others such as Kaiko’s head of research Clara Medalie have suggested that a potential shift in the Fed’s stance on rate hikes does not paint the full picture, citing Binance’s announcement on Monday that it would swap $1 billion of its BUSD stablecoin for Bitcoin, Ethereum and the exchange’s native token, GDP.
As for the Fed, whether or not the central bank can balance financial stability with the fight against rising prices is at the heart of crypto’s future.
The Fed’s next move will come after the policy meeting scheduled for next week.
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