As Banks Fail, Money Moves Into Bitcoin
April 3, 2023
- The crypto asset market had a steady month in March.
- Bitcoin and Ether are up by 20.60% and 10.70%, respectively.
- Bitcoin is buoyed by bank failures, highlighting its purpose as a decentralized store of value.
Market Overview - March
March was a bad month for banks but a good month for Bitcoin.
The Collapse of Silicon Valley Bank Sparked a Banking Crisis
It all started with the now infamous bank run on Silicon Valley Bank. The bank run was a result of poor risk management. Instead of hedging against interest rate hikes, SVB continued business as usual with its US Treasuries and MBS securities exposure. This cost them dearly, as they announced a $1.8 billion loss from selling these assets at deep discounts when the Federal Reserve raised rates faster than expected.
The collapse of Silicon Valley Bank sparked a mini contagion affecting smaller regional banks, and, most notably, some crypto-friendly banks.
Silvergate and Signature were particularly interesting to the crypto markets because both were in a fragile state before the SVB collapse. Depositors lost trust in the banking system and wanted their money back. A bank run is the Achilles heel of any bank and can only be hedged against if you raise more funds or, as we saw in this case, get help from the government.
The Federal Deposit Insurance Corporation (FDIC) needed to step in and work with the banks. The FDIC is a government corporation providing deposit insurance to U.S. commercial and savings banks depositors. Before the collapse, the FDIC determined that deposits are insured up to $250,000 per depositor.
However, to prevent further contagion spread by fear about more bank runs, the U.S. government granted an exception to allow the FDIC to cover more than $250,000 for deposits at Silicon Valley Bank and Signature Bank. Moreover, President Joe Biden said if more instability occurs in the banking system, the FDIC may guarantee deposits above $250,000 again.
The banking crisis prompted the Federal Reserve Board, with approval from the U.S. Treasury, to step in and create a new program called the Bank Term Funding Program (BTFP), in which it prints more money in an attempt to fix what appears to be a short-term problem.
The Federal Reserve stated in its announcement: “This program was created to support American businesses and households by enabling additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy. The Federal Reserve is prepared to address any liquidity pressures that may arise.”
As a result of this new program, overnight the Federal Reserve added $300 billion to its balance sheet overnight. The largest U.S. financial institutions, such as JP Morgan, Goldman Sachs, and Citibank are profiting from this program. They saw an increase in deposits and account openings as depositors left smaller banks to bank with larger institutions deemed to be safer than their smaller counterparts.
While this move by the Fed may alleviate short-term pain in the system, it is poised to cause more problems in the future. It puts them in a difficult decision with future rate decisions. The Effective Fed Funds Rate (EFFR) currently sits at 4.83%, and the goal was set for 5%.
With such an influx of newly printed money, inflation could remain high and continue to hurt the economy even further.
Also, with that move, the Fed essentially signaled to the banks that there would always be a backstop and some form of safety, which could lead to even more risk-taking behavior at banks, especially with the too-big-to-fail banks. After all, the government is there to bail them out.
While this banking crisis may have started in the U.S., banks across the pond were also affected. Switzerland's second-largest bank, Credit Suisse, also became a casualty of the turmoil in the banking sector.
To prevent a collapse of the bank and to mitigate the fallout of the systemically important global financial institutions becoming insolvent, Swiss banking giant UBS stepped in and bought Credit Suisse for $3 billion CHF with help from the Swiss government.
Swiss regulators oversaw the deal, while the Swiss government agreed to put a backstop of $9 billion in place to cover some losses that UBS may incur while taking over. Additionally, the Swiss National Bank also provided more than $100 billion of liquidity.
Bitcoin was made for this type of situation.
Back in 2008, when Satoshi Nakamoto initially released the whitepaper, he urged readers to think about alternatives to the current financial system and how we must stop trusting third parties.
A few months later, he released the Bitcoin software to the world with the Genesis Block. In it, you found a message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks“. It seems like we’re back to this with banks struggling left, right, and center. However, this time depositors have an alternative with Bitcoin.
Which is what you saw during this crisis as well. Instead of the price of Bitcoin (BTC) falling as bank shares plummeted, the price of Bitcoin rallied as many investors are turning towards the digital currency as a haven against a shaky banking system.
Crypto Asset Market Performance Review
March was a great month for Bitcoin (BTC), Ethereum ETH), and Ripple (XRP). Their prices increased by 20.6%, 10.7%, and 46.8%.
The biggest crypto winner this month was XRP, which outperformed the market significantly.
Ripple wants to expand its ecosystem into the payment settlement space and increase their B2B relationships. However, most see the recent price rise due to positive news surrounding their legal case with the SEC. Crypto traders are betting on a favorable outcome to the case, which could result in a further price jump.
The second-best performer has been Bitcoin. Its performance has been quite astonishing since the start of the year. Year to date, Bitcoin is up 70% (at the time of writing), and it looks like it wants to continue rallying.
The performance in March has been even more impressive because, for the first time in a while, Bitcoin managed to decouple itself from the stock market. For most of 2022, Bitcoin traded in line with the NASDAQ and S&P 500. With the ongoing banking crisis, analysts feared it would hit new lows. However, that didn’t come to pass.
In fact, Bitcoin did the exact opposite and turned out to be a haven for investors who lost trust in the banking industry. While big banks failed, Bitcoin thrived.
The remainder of the crypto market had moments where prices followed the top three performers. However, most of them lost momentum into the last ten days of March and ended up where they started or slightly below.
One of the bigger stories was USDC and its parent company Circle, which for a span of four days, were in trouble due to the Silicon Valley Bank situation. They had held some of their collateral at SVB, sparking fears that the stablecoin would end up unbacked. As a result, for 48 hours, USDC depegged, at times trading as low as 88 Cents. Today, the second-largest stablecoin is trading at par with the dollar again.
Bitcoin Tech Update
This month was excellent for Bitcoin investors in terms of price but also in terms of new technology updates to the ecosystem.
Zero-Knowledge Proofs Are Coming to Bitcoin
ZeroSync is a project that wants to build the ultimate toolbox for Bitcoin proofs. Ultimately, you can think of their application as a shortcut to instantly verify Bitcoin’s chain state. There is no more need to download hundreds of gigabytes of blocks.
It does this by enabling a compact cryptographic proof to validate the entire history of transactions and everyone's current balances. This is especially interesting for communities with less access to computer hardware or a reliable internet connection.
This is the first application they’re building. More updates are scheduled soon. Although the project is still in its early days, it’s exciting to see the technology adopted by other crypto networks also making its way over to Bitcoin.
Like ZeroSync, we see yet another crypto technology making its way over to Bitcoin. ZK-Rollups have been a feature on many other blockchains, such as Ethereum, for a while now.
In short, ZK-Rollups offer more variability with smart contracts on different layers. Instead of transacting everything on the main chain, you could create other layer solutions to solve particular problems. We already see this with applications like the Lightning Network or protocols like Nostr.
ZK-Rollups, in particular, are interesting because they bring Zero-Knowledge to the table and enable even faster verification through cryptography directly. There’s no more need for human or system verification.
They work pretty simply: You write a smart contract and execute a particular action off-chain. This can be used for transactions, mainly to minimize costs or for specific verification methods.
This is exciting for the Bitcoin ecosystem because it would allow building layers for different currencies on top of Bitcoin. Because we have Zero-Knowledge, there wouldn’t be much time wasted verifying these layers. All would happen instantly and return safely to the Bitcoin main chain.
We have a similar approach with Taro, but they rely more on the Lightning infrastructure. We could see the possibility of Fiat currencies on Bitcoin with ZK-Rollups. Instead of using the Lightning infrastructure, which needs liquidity in channels to run, people could use ZK-Rollups to route their local money through the Bitcoin network.
Institutional Interest in Bitcoin
March has been a good month for institutional interest in Bitcoin, with the main focus being custody and how financial institutions can offer Bitcoin to their clients.
Fidelity announced their expansion into the Bitcoin ecosystem by enabling their trading platforms to all clients. Previously available only to institutional clients, individuals can now also trade and store Bitcoin and Ethereum using their Fidelity accounts.
Next to Fidelity, we also saw Nasdaq announce a deadline for their Bitcoin product. They’re reportedly looking at Q2/2023 for the release of its custody services for Bitcoin and other cryptocurrencies. The report described a similar platform to Fidelity’s, but the focus would be on custody for institutional investors and less on trading.
Bitcoin on Balance Sheets
MicroStrategy had two major Bitcoin announcements. The first was regarding their open $205 million loan to Silvergate.
Many feared that the biggest institutional holder of Bitcoin could get in trouble with Silvergate’s issues during the banking crisis. They proved everyone wrong by paying the loan back at a premium, thanks to Bitcoin’s price rise in March.
They didn’t stop there. MicroStrategy Chairman Michael Saylor announced the additional purchase of 6,455 BTC, which increases their Bitcoin holding to 138,955 BTC.
Company Update: We are now Samara!
We usually end our newsletter with a feature of our portfolio companies. However, for this issue, we have some company news!
As you might have seen by the website’s name, we have rebranded to Samara Asset Group.
We aim to be a deep-tech-powered alternative asset manager with a hyper-focus on Bitcoin and alpha-generating strategies. We leverage our robust balance sheet to seed emerging asset managers and back the world’s best builders in Bitcoin and blockchain.