Have US government, regulators and Federal Reserve just reignited Bitcoin bull market?
This was never meant to happen. Financial regulators, the US Treasury Secretary, and the US central bank appear to have kick started the next Bitcoin bull market.
On Sunday night, regulators announced a joint statement from the Treasury Secretary, Janet Yellen, the Federal Reserve chair, Jerome Powell, and the Federal Deposit Insurance Corporation (FDIC) chair, Martin Gruenberg that emergency measures were to be rolled out to stem potential contagion from the collapse of Silicon Valley Bank, the 16th largest US bank.
The measures include ensuring that depositors with the failed bank would have access to all their money on Monday morning. Banks will also now be permitted to borrow essentially unlimited amounts from the Fed for the next year, in order to stop financial institutions from having to sell those investments that have been losing value because of the Fed’s aggressive interest rate hike agenda.
These are truly extraordinary actions taken by the authorities as they try to contain the fallout of the largest bank failure since the 2008 financial crash.
But in what is a masterclass in the law of unintended consequences, these extraordinary actions to help shore-up the traditional banking sector have also been the trigger for a crypto price recovery.
The crypto market on Friday crashed under $1 trillion, down almost $200 billion since the beginning of March, amid concerns about what the collapse of Silvergate means for the sector and wider macroeconomic issues putting on the pressure. Bitcoin fell below the $20,000 level, shedding almost 10% over the 24-hour period. Meanwhile, Ethereum dropped 9%, and the rest of the top ten echoed the trend.
However, just three days after the start of a major bank crisis, crypto prices have rebounded and are almost back where they were at the beginning of last week.
There are two reasons why the SVB measures seem to have helped to boost crypto prices.
First, the SVB rescue package from the Fed is essentially a new form of quantitative easing (QE), the bond-buying programme used by governments around the world to stabilise the financial system after the 2008 crash and later the pandemic.
QE increases the money supply, which reduces the purchasing power of traditional currencies and pushes investors to look for alternative investments such as Bitcoin, which has a limited supply, and becomes more attractive as a store of value and a hedge against inflation.
And second, it is now doubtful that the Fed, the world’s de facto central bank, will continue with its plan for aggressive interest rate hikes. The next hike was widely expected on March 22 following robust jobs data in January and February.
We expect the stress in the banking sector, and the wider impact on confidence, now will give the central bank cause for pause on its rate hike program – which is bullish for Bitcoin.
Lower interest rates make borrowing cheaper, which can lead to increased spending and investment, which could lead to increased demand for the world’s largest crypto as investors seek alternative assets with potential for higher returns.
In addition, as interest rates begin to come down, investors may be less likely to hold onto traditional safe-haven assets like bonds, and instead may look for higher-return investments like stocks or cryptocurrencies.
For many people, Bitcoin now seems more unstoppable and resilient than ever.
The banking sector crisis and the emergency measures being implemented by the US government to quell fears of contagion only appear to have fuelled investors’ optimism in crypto as the future of money.