Why Bitcoin Wins in Financial Turmoil

• Bitcoin is having a “watershed moment” thanks to the ongoing banking crisis, an analyst told Insider.
• The cryptocurrency has risen by almost 40% since the beginning of March when SVB’s collapse unleashed chaos in the banking system.
• Here are 3 reasons why bitcoin reigns supreme in a time of financial sector turbulence.

Banks are imploding, the traditional financial system is on shaky ground, and fears of a 2008-style crisis have set in.

That’s good news for some.

As global markets continue to recover from the shock of this month’s US bank collapses – Silvergate Capital, Silicon Valley Bank, Signature Bank – and a government-backed bailout of Credit Suisse in Europe, bitcoin has come out on top.

The world’s largest cryptocurrency is enjoying its best quarter in two years, rising nearly 70% since late December and hitting a nine-month high of just $29,000 last week. It has jumped nearly 40% since early March, when the banking crisis erupted, and the digital asset’s image is a futuristic alternative to traditional finance.

“This is a watershed in bitcoin’s history and adoption is likely to accelerate from here, especially if it continues to decouple from financial markets and prove its resilience in times of market stress,” said Lucy Gazmararian, crypto expert and founder of Token Bay Capital. Insider.

The rally comes after a painful 2022, in which bitcoin lost nearly two-thirds of its value as the Federal Reserve’s aggressive rate hikes, recession fears and more recently the shocking failure of industry darling FTX all undermined investor sentiment.

For many crypto enthusiasts, the rise in digital assets at a time of turmoil for other financial assets is a reason to rejoice. “This is our time!! Let’s go team $BTC!! […] “The decentralized revolution is happening,” Galaxy Digital CEO Mike Novogratz said in a tweet.

But of course not everyone is on the same page. Wharton professor Jeremy Siegel said the rally in bitcoin is set to peter out as people begin to trust banks again.

All this is to ask in the first place: Why is bitcoin shining amid global banking turmoil?

Security against bank stress

The banking crisis has triggered panic and distrust among investors in the wider financial system. That is because it has been revealed that the money people deposit in banks is the institution’s money as much as their own.

Banks use customer deposits to extend loans or invest in yielding assets such as bonds. But such investments can end in losses, as was the case with Silicon Valley Bank’s bond portfolio. This has made depositors nervous about the safety of their money – should the bank’s transactions prove unsuccessful.

That’s where the benefits of bitcoin come in. The cryptocurrency is a decentralized resource, meaning it is not controlled by an external body. And from that rises its appeal as a safer asset in times of banking stress, when the financial system is exposed to counterparty risk.

“We are likely to see increased institutional interest in the asset given its ‘safe haven’ status in times of market stress,” Gazmararian said.

Interest rate outlook

The recent financial turmoil has given investors renewed hope that the Fed will ease monetary policy, especially as some of the bank collapses stemmed from the aggressive rate hikes of the past year.

Those expectations were confirmed at the central bank’s Wednesday meeting, when policymakers raised the benchmark interest rate by 25 basis points instead of the 50 basis points traders had expected in early March. Fed Chairman Jerome Powell also acknowledged that if credit flows slow across the broader financial system as a result of the banking turmoil, the central bank may not need to be so tight with monetary policy.

Lenders have made it harder for borrowers to access credit amid the global banking panic, which has a similar effect on economic activity to a rise in interest rates — in effect, the banks are doing Fed policymakers’ jobs for them.

Should the central bank choose to loosen policy, it would be positive for crypto assets. Monetary easing means lower borrowing costs – and that will give investors more available funds to plow into risky assets like bitcoin and stocks.

More cash in the financial system

In the wake of the latest turbulence in the financial sector, the Fed has taken steps to pump more cash into the financial system to prevent more bank runs.

For example, it has created an emergency lending mechanism called the Bank Term Funding Program that will allow banks to raise money by pledging their bond holdings as collateral.

It also works in bitcoin’s favor – an increase in financial liquidity can increase the appeal of digital assets that are limited in supply, compared to traditional fiat currencies such as the US dollar. As the law of supply and demand dictates, adding money to the financial system reduces the dollar’s value simply because it becomes more readily available.

Bitcoin’s supply is limited. Only 21 million bitcoins will exist when the last one is mined in 118 years – meaning it is less likely to fall in value through central bank manipulation.