Should I keep my money in Bitcoin or a bank?
Three banks have failed in less than a week. US authorities have stepped up to stem losses, in an attempt to prevent further panic. There are genuine concerns about whether it was the right move – effectively bailing out two badly run institutions facing highly irregular problems and allowing the third to collapse – as well as the risk that more banks will fail.
So should you take your money out of the bank and keep it safe under your mattress or in bitcoin? The answer is, if you’re anything like me, all the money you have in a checking account is insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000. So, no, JPMorgan Chase is unlikely to incubate you.
This article is taken from The Node, CoinDesk’s daily roundup of the top stories in blockchain and crypto news. You can subscribe to get the whole newsletter here.
Still, many are moving their money to crypto, like Tatiana Koffman, who described the move Monday in CoinDesk as an act of protest. Stablecoins aside, crypto is volatile, making these assets less than ideal currencies if you want to preserve your wealth. But they offer “root ownership” – meaning no one can make a run for your deposits.
Bitcoin, as many have already said, was born out of an earlier banking crisis. The blockchain’s very first block contained a message about rescue operations. It was designed to separate third parties from internet money by making people responsible for their own keys, unlike the highly intertwined private banking and public sectors.
President Joe Biden has said that American taxpayers will not foot the bill for the bailout and that, unlike in 2008, the architects of this financial crash will not benefit. There are enough responsible actors here to play the blame game, but if you’re like Tatiana, the problem is the system itself.
SVB essentially bet that interest rates would stay close to zero forever. Over the past couple of years, it brought in deposits from a tech industry that was booming, in part because of historically low prices that made venture capital funding worth the risk for many investors. In an attempt to get as much return as possible from these deposits, SVB used a majority of its money in long-term, fixed-rate investments.
The Federal Reserve, as my colleague David Z. Morris wrote, essentially created the basis for a tech hype cycle through financial development to stimulate the economy, then threw the frying pan into ice water when things got too hot. The latest rate hikes weren’t necessarily unpredictable, but the Fed’s inconsistent messaging — saying rate hikes were unthinkable until they weren’t — didn’t help matters.
Venture capitalists like Peter Thiel helped accelerate SVB’s outsized growth, and its hastened collapse. Thiel is reportedly a believer in Girardian mimicry, which explains why groups of people make predictable if irrational decisions and our relentless hunt for scapegoats. Tech executives have said that SVB grew out of a feedback loop that made it the place for startups to knock.
A similar social dynamic, fueled by chat groups and social media, also kicked in on the way down. Some even put sometime-CoinDesk writer Byrne Hobart at the center of things, because he wrote a supposedly well-read blog last month saying that SVB was insolvent. So depositors like Roku, which left about $487 million uninsured with SVB, are not blameless.
Politicians, who like Florida Governor Ron DeSantis use the situation to justify their pet causes, once promised us “no more bailouts,” yet wrote the rules that allowed SVB to use some accounting magic and hide billions in unrealized losses. Some, like former Rep. Barney Frank, said Signature Bank, where he is now a board member, was attacked for political reasons because it traded in crypto.
When Frank was in Congress, he co-sponsored the legislation that eventually passed as the Dodd-Frank Act of 2010, preventing bank failures. Signature had reportedly experienced the worst of its bank run and could have survived without government intervention, Frank said. If moral hazard is the argument that people will engage in riskier behavior if they are protected from the consequences of their actions, then we need a new label for Frank’s claims.
There were good arguments for stepping in and preventing a catastrophic blow to the valuable American technology industry. Taxpayers’ money is not spent (at least not directly), deposits to growing businesses are safe, shareholders and bondholders are not bailed out, and even the New York Times is calling for the return of SVB executives’ compensation and stock sales.
And, yes, there are solid arguments for letting Silicon Valley Bank and Signature run their course. Expected losses were almost certainly exaggerated. A healthy startup could have raised equity and bankrolled elsewhere, and that would have put the fear of God back into the supposedly capitalist American economy.
But not failing SVB and Signature was never an option. Bank failures today are extremely rare and would cause a huge amount of panic, such as how the collapse of Silvergate Bank – essentially a free-floating entity detached from the wider economy – led to it. And because SVB and Signature both rode the wave of cheap money created by Fed policy up and down, how separate can private and public interests really be?
So if the US government is officially bailing out banks, should you keep your money in a bank?