Financial institutions with ties to the crypto industry have had a rough few weeks. Silvergate, a main banking service provider for crypto companies, collapsed. Silicon Valley Bank, a favorite of tech startups, failed and was taken over by the federal government, as did Signature Bank in New York, which pivoted from supporting taxi companies and Trump companies to — you guessed it — crypto.
Yet crypto markets have been on the rise over the last week, with the trading value of Bitcoin, one of the largest gainers, jumping 14 percent to around $24,700 since Silvergate wound down. What’s going on?
Experts say there are several reasons crypto appears to be bucking the prevailing financial gloom right now, including a bet that the Federal Reserve Bank will slow its interest rate hikes. Another major factor is that the recent banking failures present the exact situation for which crypto has long touted itself as a solution — an opaque banking system where you may not be able to access all your money if a bank fails, given that the Federal Deposit Insurance Corp. insurance covers $250,000 per depositor, per bank.
By contrast, cryptocurrencies like Bitcoin are part of a decentralized financial system. While crypto holdings and banks aren’t backed by federal deposit insurance as traditional banks are, they also aren’t fundamentally beholden to any government. When crypto scams fall apart or projects collapse, investors don’t have clear recourse to get their money back. Even so, the current problems with the traditional financial system have convinced crypto boosters that this is crypto’s “time to shine.”
“The strong performance of Bitcoin over the past few days is largely driven by macroeconomic factors, specifically growing expectations of a cut in U.S. interest rates within the next few months,” said Noelle Acheson, author of the Crypto is Macro Now newsletter and former head of market insights at Genesis Trading, a digital asset financial services firm. “This tends to favor assets with relatively high volatility, since lower rates imply easier credit, which in turn implies more money chasing higher returns.”
While stocks and bonds would normally fall into that category, she said, “the worsening economic outlook means that these are likely to be hit by earnings downgrades and credit concerns. Bitcoin, on the other hand, has no earnings and also has no credit to worry about.”
Crypto’s current comeback is following a historical pattern. During previous banking crises — such as the 2013 failure of multiple banks in Cyprus, in which depositors lost billions of dollars — crypto markets reacted positively. In March 2013, the month bank runs began in Cyprus, Bitcoin’s value surged 178 percent, to $93, before setting a record high that May of around $250.
(The pandemic saw a deviation from this pattern, with crypto more closely following the stock market’s rise and fall during the first two years of the covid crisis.)
“I’ve always thought this is an interesting thing — any time people get jittery about the operation of the overall banking system, particularly if it might mean that access to deposits might be restricted either by the bank or the government, then Bitcoin jumps in price,” said Omid Malekan, an adjunct professor at Columbia Business School who teaches courses on crypto and blockchain. “Because it’s censorship-resistant, nobody can ever deny access to anybody. And while the price might fluctuate, if you can’t get access to your dollars at a bank that’s shut down, how valuable are those dollars anyway?”
Malekan was quick to note that gold was also up in price, perhaps with an expectation the Federal Reserve might lower interest rates to lessen the shocks of the recent U.S. bank collapses.
During the first years of the pandemic, Malekan said, there was so much money printing and economic stimulus money in play that fears of inflation grew and the price of crypto rose. Over the past year, the Federal Reserve and other central banks hiked interest rates, tightening liquidity to rein in inflation — reducing the appeal of Bitcoin. But that seems to be changing with the new stress on financial markets more broadly.
“The anticipation now is that this banking crisis that began last week is going to force the Fed to have to stop tightening monetary policy and potentially to start loosening it again,” said Malekan.
Acheson echoed this. She also argued that the recent bank failures have highlighted the opacity and fragility of the traditional banking system, which will probably encourage some people to think more deeply about the potential benefit of an alternative financial network.
“This is more a longer-term shift, though, supported by skyrocketing inflation in some countries as well as building geopolitical tensions and a growing awareness of the need for seizure-resistant stores of value,” said Acheson. “Shorter term, a looser monetary environment favors risk assets, and we are likely to see continued inflows from macro investors.”
And this is an opportunity for crypto to reiterate its central value proposition, as advocates were quick to do. Instead of relying on centralized authorities and governmental bodies to enforce things, you can enforce via transparent code, according to Sunny Aggarwal, co-founder of Osmosis Labs, a decentralized crypto exchange.
“Code can enforce that rules are followed, whereas governments can’t magically enforce that rules are followed. All they can do is punish or enforce after the fact,” said Aggarwal. “But that doesn’t help when you know that your money is gone, right?”
But crypto, to be fair, can cut both ways. If you tend to be “self-sovereign” with your finances, you don’t risk losing assets beyond the $250,000 FDIC limit in the case of a bank failure. At the same time, there is no one to help if a cryptocurrency evaporates, as the algorithmic stablecoin Terra did last year — leaving people with little to nothing.
Mark Lurie, CEO of Shipyard Software, said the only reason the traditional banking system periodically needs saving is because it is a fractional reserve system, in which banks lend out more than they take in.
“This is a social construct that is only viable because the government licenses banks to effectively print money,” said Lurie. “In crypto, lending is all overcollateralized, thus there is no need for the government to step in if a coin falls because a run on the bank would simply drain the bank without creating contagion. Whether you see that as a worthwhile trade-off has a lot to do with whether you are a crypto purist.”
Crypto advocates were also quick to point out that the industry still needs time to develop — even after the collapse of billion-dollar institutions like FTX.
“This is what happened with Linux — a toy operating system that for years many people couldn’t even imagine being a threat to commercial alternatives but that now runs much of the internet and is incredibly secure, fast and reliable,” said Barney Mannerings, co-founder of Vega Protocol, a trading and derivatives scaling layer for Web3 applications.
Getting into crypto, he said, offers the same risk as being an early venture capitalist or angel investor — it can go boom and disrupt an industry, or it can go bust.
“The real risks lie in the centralized crypto services,” said Mannerings. “These have all the risks of centralized finance and more, but no real oversight. They are truly the worst of both worlds. When it comes to early-stage projects and coins, which is almost all of them at this point, people need to be realistic about what they are getting into.”
An earlier version of this article misstated Mark Lurie’s title. This version has been corrected.
Thanks to Lillian Barkley for copy editing this article.