Bitcoin and other cryptocurrencies had the opposite reaction to the news of Silicon Valley Bank’s collapse than traditional stocks: They actually rose.
The pop continued bitcoin’s generally positive growth this year, adding to the digital asset’s positive performance against other investments. Experts don’t assign just one cause for the growth but rather attribute the rally to several factors.
SVB COLLAPSE: BANK DONATED OVER $70 MILLION TO BLACK LIVES MATTER GROUPS BEFORE CLOSURES
The Federal Deposit Insurance Corporation announced on Friday that Silicon Valley Bank, known as SVB, had failed and been taken into government hands. The move caused some to speculate about a bank run, with regulators also closing major crypto lender Signature Bank on Sunday.
Officials provided reassurances the weekend before markets opened back up that all depositors would be made whole. The federal government announced that it would back all deposits in the banks, even those in excess of the FDIC’s $250,000 threshold, and the Federal Reserve rolled out a new source of funding for banks that might face runs by depositors, called the Bank Term Funding Program.
But bitcoin quickly gained while the banking sector struggled with SVB’s fallout.
The Wednesday after the collapse, bitcoin was flirting with the key $25,000 threshold. That was the same day that Swiss megabank Credit Suisse began flailing and other regional U.S. banks saw their credit ratings reviewed.
The flagship cryptocurrency even reached as high as $26,400 the day before, a massive 34% increase from before SVB’s implosion on Friday. Ethereum had similar gains, reaching $1,780 earlier on Tuesday — 29% higher than Friday’s trough.
David Sacco, an instructor in finance and economics at the University of New Haven’s Pompea College of Business, pointed out to the Washington Examiner that for most of the past year-and-a-half, crypto has largely tracked other risk assets, meaning that it hadn’t been performing well in 2022.
Cryptocurrencies began to fall dramatically in the spring and summer of last year as the Fed first started hiking interest rates. Higher rates generally lower the value of risk assets such as stocks and, the past year has shown, digital tokens.
In downturns, investors typically flee risky investments in favor of safer and more stable stores of value. Bitcoin and other cryptocurrencies are still an emerging asset class, and part of the declines that were seen last year happened because crypto holders were selling off their assets for fear they will crash, resulting in a chain reaction effect.
This time, bitcoin and other major cryptocurrencies are moving in the opposite way than one might suspect. Sacco said that over the past year, cryptocurrency was performing in a way that drove risk-averse investors away, but perhaps the recent exposure of risk in the banking system has changed that a bit.
There is also the matter of the fundamentals of bitcoin and cryptocurrency. Proponents contend that the underlying blockchain technology offers a safe haven for investors leery of the banking system and government ties.
“If you think about the role that crypto could someday play, it’s sort of an alternative to government-controlled currencies and monetary systems,” Sacco said. “I think it’s a little bit of that — here’s one reason why crypto may gain some traction someday if people start to lose confidence in banking systems.”
John Berlau, a senior fellow and director of finance policy at the Competitive Enterprise Institute, told the Washington Examiner that some investors might view bitcoin similarly to investments such as gold, which typically rise in value when the banking sector is on shaky ground.
“It has a lot of the qualities of a precious metal, plus being in a convenient digital form, and so it’s proving to outlast the institutions that serve it … as a form of currency and with the blockchain technology it carries,” said Berlau.
Gold prices did rise somewhat following SVB’s failure. Gold futures were nearly 6% in the days after SVB’s collapse, growth that still lagged behind bitcoin and some other cryptocurrencies.
It is also worth noting that bitcoin had already been having a pretty good year. On New Year’s Day, bitcoin was trading at about $16,500 and was generally below $17,000 for most of the time after crypto firm FTX’s dramatic implosion in mid-November. But since then, bitcoin has gained an astounding more than 47%. Ethereum, the second-largest cryptocurrency, has increased by nearly 40% during that same period.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Investors will be closely watching the saga with the banking sector play out. Some cryptocurrency experts predict that if the rout continues, it might keep proving to be a boon for bitcoin and other digital assets.
“I think to the extent that the banking crisis story continues to have legs, I suspect that is going to be good for crypto, but again, it’s a new trading pattern, so we’ll see what happens,” Sacco said, noting that another test for the trading pattern is that if bank stocks recover and start going back down, it would be expected that crypto would decline.
