Credit Suisse Crisis Has Bitcoin Investors Feeling Bullish

As the banking sector continues to roil, this time Credit Suisse, crypto enthusiasts are already taking victory laps on Twitter.

“The macro backdrop for Bitcoin has never been more perfect,” wrote co-founder of Mechanism Capital Andrew Kang.

Others, alluding to the inscription enshrined in the network’s first block, echoed the sentiment, saying “Bitcoin was made for this.”

Looking beyond the chatter, though, paints a much more complex picture, one that reveals just how intertwined Bitcoin and cryptocurrencies are with the Federal Reserve’s monetary regime.

It boils down to rate hikes and how risky investors consider digital assets.

As rates rise to tame inflation, making money more expensive to borrow, investors leave riskier assets like stocks and cryptocurrencies for surer bets like U.S. Treasury Bills, which have seen their yields trend upward as the Fed tightens.

But as rates rise, they can also put the squeeze on banks.

Silicon Valley Bank, for example, revealed that it had shifted into bonds with variably-termed maturation periods. As its tech and startup-centric client withdrew funds to extend their runway, though, SVB was forced to sell these bonds before they matured, resulting in a hefty loss and ultimately the bank’s closure last week.

Many have criticized SVB executives for the collapse, including President Biden. Others have, however, said the pace at which the Federal Reserve is raising rates is also to blame.

Thus, putting hikes on pause would create fertile ground for high-risk assets like Bitcoin to thrive.  And today’s continued banking chaos suggests such a pause could very well be on the cards.

Fed hikes on pause?

The likelihood of the Federal Reserve putting interest rate hikes on pause swelled Wednesday as investor confidence in European bank stocks wobbled.

Fed funds futures indicated a 59% chance that the Fed would put its most aggressive tightening cycle in 40 years on pause, nearly doubling from a 31% chance the day before, according to the CME FedWatch tool.

The central bank looked likely to keep raising interest rates yesterday as American bank stocks showed signs of stabilizing.

But that changed as Credit Suisse’s stock plunged over 25% on news that Saudi National Bank—the institution’s biggest lender—wouldn’t offer Credit Suisse more financial help, as reported by Reuters.

Shares of other European banks toppled upwards of 8% too, including Commerzbank, BNP Paribas, and Societe Generale. In the US, major stock indexes like the S&P 500 and the Nasdaq Composite shaved off 1.5% and 1%, respectively, less than an hour after markets opened amid Credit Suisse’s troubles.

Crypto’s windy road out of winter

Investors across the globe could adopt a risk-averse stance as uncertainty in financial markets continues to rear its head, Managing Director at Wave Digital Assets Nauman Sheikh told Decrypt, leading the price of risk assets such as crypto and stocks to fall over the short term.

“This is another example of a bank run that could definitely have a positive effect on crypto in the medium term, but short term, if the whole world is on a risk-off mode, I think [crypto] should follow down downwards as well,” he said.

Though the price of Bitcoin has risen 11.3% to around $24,800 at press time, the largest coin by market capitalization had fallen 4.5% over the past day, according to CoinGecko. Ethereum was down 4.6% to around $1,660, showing weekly gains of 6.3%.

Despite recent gains, Bitcoin still shows a significant correlation with stock indexes like the Nasdaq and S&P 500, as the Fed’s tightening has been a driving force behind the value of both stocks and crypto.

The recent failures of Signature and Silvergate have also raised concerns about the ability of crypto-native firms to establish banking partnerships, amid a regulatory crackdown on the digital assets industry—the New York Attorney General’s office claimed Ethereum is a security in its lawsuit against cryptocurrency exchange KuCoin announced earlier this month.

Regardless, crypto as an asset class has shown signs of resiliency amid a tumultuous time in financial markets, said Sheikh.

“The crypto banks, they’re fewer and far between now, the regulation is clearly anti-crypto, but nevertheless, crypto is holding its ground,” Sheikh said. “I think it's been remarkable how it's performed.”

Some analysts, including James Butterfill of CoinShares, have posited that the recent surge in crypto prices is representative of investors’ growing mistrust in the banking system as cracks form in the financial system.

On top of that the notion that the Fed could pause rates or even cut in response to a strain in the banking sectors is good for risk assets, said Chief International Economist at ING Bank James Knightley.

Others like Kaiko’s Head of Research Clara Medalie have suggested that a potential shift in the Fed’s attitudes towards interest rate hikes doesn’t offer a complete picture, referencing Binance’s announcement Monday that it would swap $1 billion of its BUSD stablecoin for Bitcoin, Ethereum, and the exchange’s native token, BNB.

As far as the Fed goes, whether or not the central bank can balance financial stability with its fight against rising prices is core to crypto’s future.

The Fed’s next move will come after its policy meeting scheduled to take place next week.