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.

SEC, DOJ Investigating Insider Stock Sales at Silicon Valley Bank: WSJ

The U.S. Justice Department and the U.S. Securities and Exchange Commission are investigating the collapse of Silicon Valley Bank, according to a report today from The Wall Street Journal. The investigations include looking at stock sales SVB's bosses made before the bank crashed, WSJ reported. The Justice Department has involved its fraud prosecutors in Washington and San Francisco, it added. Just two weeks before the collapse of SVB, its CEO Greg Becker sold $3.6 million of company stock, regu...

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.

Bitcoin Is Pumping—But It’s Not Yet 'Decoupling' From Stocks, Analysts Say

As Bitcoin’s price surged past $26,000 on Tuesday, crypto traders were quick to claim that the recent uptick in digital asset prices represented a significant shift in momentum. Crypto Twitter is filled with examples of users claiming that the spike in Bitcoin’s price is evidence of digital assets diverging from other risk assets like stocks, with some calling it “The Great Decoupling.” For much of last year, digital assets and equities have traded in similar directions, amid an economic slowdow...

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.

New York Attorney General Sues KuCoin, Claims Ethereum Is a Security

The New York Attorney General's office today filed a lawsuit against cryptocurrency exchange KuCoin for allegedly violating securities and commodities laws in the state. In the complaint, Attorney General Letitia James makes the startling claim that not only are Terra (LUNA) and TerraUSD (UST) securities, as previously alleged by the United States Securities and Exchange Commission, but also Ethereum (ETH), the second-largest cryptocurrency by market capitalization. “This action is one of the fi...

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.

Why Was Signature Bank Really Shut Down?

New York regulators quickly took control of Signature Bank Sunday night, making it the third bank to close its doors in a week—and the third largest bank failure in U.S. history.  The move to shutter the crypto-friendly bank, which lent money to firms in the digital asset space and facilitated crypto-to-fiat transactions via its Signet network, caught many by surprise (including those who worked there.) Why was it closed, then? And is it part of a broader crackdown by regulators targeting crypto...

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.