Soon after First Republic Bank revealed in its quarterly report on April 24 that its high-net clientele was pulling out deposits, Bitcoin’s price jumped on the charts, recording its biggest daily gain in a week.
Over the next two days, Bitcoin’s gaining spree continued as it racked up another 6 percent gain and briefly touched the $30,000 threshold before profit-taking kicked in.
The largest cryptocurrency in the world has jumped by around 70 percent in 2023 so far, following a harrowing 2022 in which industry-wide collapses slashed the demand for digital currencies.
At one point, Bitcoin fell to $15,500, a 77 percent discount compared to its November 2022 all-time high.
Several analysts predicted that Bitcoin's losing streak would continue in 2023, owing to macroeconomic headwinds and a weakening US economy. However, Bitcoin has so far disappointed bearish forecasters while pleasantly surprising bulls.
Its performance in March was particularly noteworthy as the king coin recorded its second-highest monthly gain in 17 months, jumping 23 percent and convincingly breaking above the $24,000 barrier.
Meanwhile, Wall Street investors were left scratching their heads after the S&P 500's heavily reliant financial sector fell 9.74 percent in March following a spree of bank closures in what has been dubbed the “US Banking Crisis”.
On April 1, First Republic Bank became the latest addition to the crisis after facing a liquidity shortfall that forced JP Morgan to take over its operations. The bank’s quarterly report revealed that customers had initiated deposits worth over $100 billion since rating agencies began downgrading its credit ratings in March.
Is Bitcoin’s gain during the banking turmoil a coincidence, or are there more legs to the story? Let us rewind the clock a little bit. During the second week of March, California-based Silvergate Bank, whose Chief Executive had personally invested in Bitcoin, went belly after customers initiated mass withdrawals.
The news came on the back of high-profile bankruptcies in the crypto sector, namely FTX, which was a client of Silvergate.
During the same time, Bitcoin’s price fell sharply, slipping below the $21,500 support mark. The initial commentary implied that the cryptocurrency sector's woes had spread to Wall Street and that financial firms exposed to the distressed market would experience difficulties.
The same did not bode well for Bitcoin, which continued to bleed on the charts. Between March 8-11, Bitcoin declined by as much as 13 percent, hitting a near 2-month low at $19,500.
Shortly after, Silicon Valley Bank (SVB) and Signature Bank, two more companies under the Wall Street banner, collapsed in spectacular fashion. Silicon Valley Bank chose to close its doors on March 10 due to a lack of liquidity to meet its operational needs.
Previously, the bank stated that it required $2.25 billion to buttress its balance sheet. As fears of banking contagion forced many to withdraw their bank deposits, Signature Bank was also unable to continue operating in a difficult environment.
But Bitcoin, which initially fell after Silvergate’s collapse, moved in the opposite direction this time around. Between March 11-24, Bitcoin soared by over 40 percent and headed toward the $30,000 mark. These gains were the highest that Bitcoin had seen since January when its value picked up from $16,000 to hit $24,000.
Many were surprised to see money pouring into digital assets after the banking crisis prompted regulators to crack down hard on crypto businesses. In recent times, top crypto exchanges such as Binance, Coinbase, and Kraken, have faced scrutiny over their operations by US watchdogs.
What is the correlation here?
Another important aspect to consider here is that the crypto sector was thought to be loosely connected to Wall Street indices, particularly the S&P 500. Although the S&P 500 posted single-digit gains in March, the financial sector’s poor performance raised concerns that the ’too big to fail’ label would come undone. The same could have negatively impacted the crypto market as well.
This brings us to the next question – Why is Bitcoin rising? There are several answers, but none can be confirmed until the events continue to unfold in the coming months. The base argument here is that investors are pouring money into cryptocurrency because the banking crisis supports the image of cryptocurrency as a decentralized alternative that does not rely on a third party for its price.
Another argument is that crypto’s potential as a hedge against inflation has picked up in recent times following a sharp increase in the value of goods and services across the world.
However, a New York Times article introduced another element in the mix by stating that the gains had little to do with Bitcoin’s technological philosophy. Instead, optimism about potential rate cuts and questions about the safety of stablecoins had a bigger effect on Bitcoin.
Speaking to NYT, an analyst said that the flows were just going out of stablecoins and into Bitcoin. The banking sector’s downfall threatened funds held by Circle, one of the biggest stablecoin issuers. As per NYT, traders who held large amounts of stablecoins are looking for alternate investments.
Conclusion
As mentioned earlier, it is difficult to say whether fundamentals are driving Bitcoin’s price, or sentiment. This is mainly because Bitcoin is yet to solidify its position in the market.
On some occasions, it is placed beside gold as a safe haven investment, and on the other, it is viewed as a risky and volatile investment.
Where Bitcoin’s price will land by 2023 end and will the banking crisis fuel Bitcoin’s price, are questions that can only be answered once the market matures further in the coming months.
Also read: Is the crypto winter over?
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