Market Byte: Bitcoin is Up. Why?

Maximo B&W
Matt Maximo
Zhao B&W
Michael Zhao
Last Update 03/21/2023

As the market braces for the next Federal Open Market Committee (FOMC) meeting slated for tomorrow, Wednesday, March 22, 2023, Bitcoin may emerge as a strong performer regardless of the outcome. The Fed must decide whether to continue aggressively taming inflation or prevent further risk to the banking system by slowing the pace of rate increases. Over the last eight  meetings, the FOMC has increased rates by 4.5%. With nearly 200 banks experiencing similar pressures to Silvergate (SI), Silicon Valley Bank (SVB), and Signature Bank (SBNY), the market is now expecting the Fed to slow tightening by implementing a rate hike of only 25 bps.

Bitcoin, however, is likely in a unique position to benefit whether the Fed continues aggressive rate hikes or takes a more dovish stance, as the market seems to expect will be the outcome. Since the closure of SVB on March 10, 2023, Bitcoin is up 39% (Figure 1), despite a series of setbacks, including the loss of banking partners for digital asset market participants or regulatory clampdowns. Still, 20% of Americans own at least one digital asset — a trend that does not appear to be slowing down.

Figure 1: Price Returns since SVB Closure

Source: TradingView as of 3/10/2023 to 3/20/2023. Past performance is not indicative of future results. 

Scenario 1: Rate Hikes Slow

The market currently expects the Fed to slow their pace of rate hikes, and expects a 25 bps increase versus the 50 bps (or more) which would be consistent with rate hikes in 2022. Given the relationship between interest rates and asset prices, we expect that a lower-than-expected hike tomorrow could result in a rally for risk assets — like Bitcoin, in particular. Should this outcome play out, we could reasonably experience a short-term positive price impact on Bitcoin and possibly the broader crypto market.

Figure 2: CME FedWatch Tool

Source: CME FedWatch Tool as of 3/21/2023 at 11 am ET

Scenario 2: Interest Rates Rise

Bitcoin may be less directly impacted in a scenario where the Fed maintains its commitment to aggressively raising rates. However, we believe Bitcoin’s unique ability to act as a safe haven asset may still allow the digital asset to capture upside.

Banks around the world are struggling due to the rapid increase of rates resulting in the devaluation of bonds they had purchased when interest rates were still near zero. Rising interest rates decreased the value of these bonds, leaving billions in unrealized losses on their balance sheets. Weaker balance sheets have created increased liquidity risks, particularly when banks face unprecedented withdrawals, which occurred at SVB. When the market sensed a potential liquidity crisis at SVB, investors and CEOs scrambled to withdraw their assets, resulting in $42 billion in withdrawal requests in a single day — nearly 25% of the total assets held by SVB. Under a fractional reserve banking system,1 it is unlikely that any bank could fulfill withdrawal requests of that magnitude or in that limited timeframe.

On March 17, Secretary of the Treasury, Janet Yellen, stated that banks will only receive a bailout if their failure poses a significant systemic risk to the financial system. In other words, small regional banks may not receive the same support to backstop deposits as their larger counterparts. To put this into context: the top 10 banks hold more domestic assets than the remaining 2,124 banks combined (Figure 3). As a result of recent events and remarks, large banks have already reported massive inflows since March 10, and regional banks are especially vulnerable due to lack of investor confidence in government intervention in insuring smaller banks’ assets.  

We believe a mass exodus of deposits from smaller banks for the largest ‘systemically important’ banks  could spark notable upside for Bitcoin prices. Despite its rapid growth since 2008, Bitcoin is still a nascent asset class with a growing ecosystem and trading platforms with relatively low liquidity compared to traditional markets. The top 10 trading pairs across all trading platforms for Bitcoin have an average +/-2% order book depth of ~$11 million.2 With more than $8 trillion held outside of the top 10 largest banks, even a modest fraction of capital reallocation from banks to Bitcoin could trigger substantial price movement.

Figure 3: Consolidated Domestic US Bank Assets

Source: Federal Reserve Statistical Release as of 12/31/2022

Upon analysis, it appears that some investors have already chosen to allocate money to Bitcoin. As deposits leave smaller banks to find a safer home, Bitcoin seems to be one of the  beneficiaries; the number of addresses holding more than $100 of Bitcoin has increased by more than 1.5 million since the closure of SVB on March 10.3 Bitcoin is also demonstrating certain properties of a “safe-haven” asset, exemplified by the increasing correlations of Bitcoin and Gold, while Bitcoin and risk asset correlations (SPX Index4) are decreasing (Figure 4).

Figure 4: Correlations; Bitcoin & SPX Index and Bitcoin & Gold

Source: CoinMetrics, Yahoo Finance. 4/21/2022 to 3/21/2023 14D rolling correlation

Bitcoin was created in 2008 during the Great Financial Crisis with, amongst other aims, a mission to protect people against the fractional reserve banking system. Bitcoin was designed to serve as a self-sovereign and digitally native currency in the growing digital economy. The initial ethos and value of Bitcoin appears to be resonating with investors now more than ever, in particular, those who may be seeking  an alternative during this moment of uncertainty and instability with the traditional banking system.

1. Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.

2. CoinMarketCap as of 3/21/2023

3. Glassnode. 3/10/2023 to 3/20/2023

4. The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.

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