Cryptocurrencies are on the rise as investors seek a safe haven from the volatility hitting the banking sector. But is this digital currency the answer?
Bitcoin, in particular, has seen a significant spike in value since the collapse of Silicon Valley Bank. The price of the cryptocurrency has risen from $20,447 on the morning of the bank’s collapse to $27,818 at the time of writing.
While the practical applications of Bitcoin and other cryptocurrencies may be limited, the theoretical potential is driving the rally. According to GlobalData, the rise in value is being driven by investors who are looking for a safe place to park their money amid the chaos in the banking sector.
When contagion spreads among big banks, their headwind can become crypto’s tailwind. This is because the founding principle behind Bitcoin was giving the citizen greater control over their money through a decentralised system. The first block in the Bitcoin blockchain – which is called the genesis block – was mined on 3 January 2009 by Satoshi Nakamoto, the pseudonym for the creator(s) of Bitcoin.
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However, if the rally continues, Muru imagines that the rationale for institutional investors will be that they view Bitcoin as a long-term investment to limit exposure to deposit risk from banks.
“I don’t see it being an end to the crypto winter,” said Muru, adding that the consensus within the cryptocurrency ecosystem is that a high interest rate environment was the first domino in the crypto winter because it killed risk-on trading and plummeted the crypto market cap.
“It seems awfully convenient to call Bitcoin a ‘safe-haven’ asset now, after interest rate hikes hit centralised banks in a comparatively worse way,” said Muru.
However, the crypto ecosystem is facing its own investor confidence crisis, following the collapse of one of the world’s biggest crypto exchanges, FTX. In March 2023, Silvergate, a lender to crypto companies including FTX, announced bankruptcy.
The long-term beneficiaries of this regional banking volatility – particularly in the US – are still unknown.
As investors flee regional banks for the safety of top-tier multinationals, JPMorgan, Bank of America, Citibank and Wells Fargo are poised to benefit. Stephen Walker, GlobalData fintech thematic analyst, said, “In terms of the wider sector there will be a flight to quality as bigger banks soak up deposits and credit will be less available and only extended to low-risk borrowers.”
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