The 2023 banking crisis: A wake-up call to buy Bitcoin?

The banking crisis and the "come-back" of Bitcoin

In less than a month, two of the most “crypto-friendly” banks, Silvergate and Signature, and the biggest bank for tech startups, Silicon Valley Bank (SVB), were hit by a chain-like crisis. In that situation, the Fed had to release a 2.25 trillion USD support package to stop the fire from spreading to the whole banking industry.

Credit Suisse, a Swiss bank that has been around for almost 170 years, was in a similar situation. It got over 50 billion USD in bailout money from the country's central bank, but in the end, competitor UBS had to buy it out to keep it from going bankrupt.

While at its core, at least for SVB, the banking crisis of 2023 is different from the one in 2008 in that it is not a bad debt crisis but rather an interest rate crisis.

Due to their good relationships with customers who are also venture capital investors in the Bay Area of San Francisco, SVB was able to easily get customers from startups that were funded by these investors...

A few years ago, when the tech industry was still in its “golden age", a series of successful IPOs and fundraising efforts brought these startups a lot of cash, which they then put into SVB. Then, during the Covid-19 pandemic, interest rates were kept low in the US to help the economy get through it.

The leaders of SVB decided to buy a lot of Treasury bonds, which were still thought to be among the safest investments in the world. To make the most money, SVB chose a very long maturity date.

But, as everyone has already known, what happened next was not at all what SVB had expected. The Russia-Ukraine war broke out, energy prices skyrocketed, inflation shot up, and the Fed kept raising interest rates on the US dollar, which in turn hurt whoever was keeping the most Treasury bonds: SVB.

As a result, even though they didn't have any bad debts, SVB's assets went down in value. The collapse of SVB, which held the money of more than half of Silicon Valley's tech companies, created a mass withdrawal effect out of Signature and Silvergate, whose customer base was primarily made up of crypto businesses.

“The origin of the problem for banks in 2008 originated from Mortgage Backed Securities, while the recent issues that US banks have faced are due to long-term government bonds. Specifically, banks such as SVB incurred losses from holding too many long-term bonds as the Fed raised interest rates and depositors suddenly withdrew their money."

Dr. Binh Nguyen Thanh, co-founder and coordinator of RMIT Fintech-Crypto-Hub, also Senior Program Manager of RMIT Blockchain Enabled Business, RMIT Vietnam

In this context, it is expected that the United States will enter a difficult economic phase with persistent inflation, and investors are advised to avoid investing heavily in fixed-income securities. Rather, they should invest in short-term government bonds, gold, and other assets that may serve as a hedge against inflation, according to Nouriel Roubini, a renowned economist who predicted the 2008 US credit crisis. (Roubini is currently the CEO of Roubini Macro Associates and a professor at NYU).

These other assets, although not directly mentioned by Roubini, may include cryptocurrencies in general and Bitcoin in particular. As the global banking industry has been in turmoil in recent weeks, it is also the time when we see trading volumes of Bitcoin on both spot and derivative markets increase significantly, currently at $27,775.61, representing an increase of 24.3% in the last 30 days, according to real-time updated data from Coingecko.

Previously, the value of Bitcoin has been steadily increasing since mid-March due to the instability and concerns surrounding the collapse of several banks including SVB, Signature, and Silvergate, as well as the trust in the stability of the US financial system.

Sharing the same opinion, Dr. Binh Nguyen Thanh assessed that “after recent developments, Bitcoin may be recognized more by the traditional financial system. Bitcoin can become a market risk hedging tool similar to gold, and like gold, it has no counterparty risk".

Bitcoin was created during the big financial crisis of 2008 and created a new financial platform for the internet world, without intermediaries. Now, as many banks are shaky, the value of Bitcoin is being recognized more clearly.

Despite Federal Reserve Chairman Jerome Powell's decision to increase by 25 basis points, the recent increase in Bitcoin trading signals a potential bull market, according to Cryptonews writer Joel Frank.

Specifically, according to data from The Block, the 7-day moving average of Bitcoin trading volume on exchanges has reached its highest level since mid-2021, reaching around 24 billion USD at the beginning of this week.

In addition, the volume of Bitcoin futures trading on exchanges in March has surpassed that of September 2022, reaching nearly $1 trillion. The sharp increase in options market trading volume also indicates an increase in Bitcoin trading activity by financial institutions, which are entering the market with larger quantities and scales.

So, there are many signs that the recent price increases in Bitcoin are probably not just short-term trends. Even before the US banking crisis and before the Fed raised interest rates, many investors thought that the bear market of 2022 was over.

However, positive underlying trends (like more people wanting Bitcoin as an alternative to fiat currency and in anticipation of Fed interest rate cuts), positive signals on the blockchain (like more network activity), and positive trading trends (like more investors buying) will continue to support the future, even though there may be volatility in the coming months, Joel Frank from Cryptonews evaluated the situation.

Michael J. Casey, chief content editor của CoinDesk, calls the current time a “Bitcoin Cyprus Moment". He compares what is happening in the banking industry and how the market is reacting to what happened in Cyprus 10 years ago, when the government put a 10% tax on all money withdrawn from banks. This made people angry and led them to look for a way to store their money outside of the banking system.

Thorn says that the rise in the price of Bitcoin is also a sign that people are becoming more interested in its "decentralized" and "censorship-resistant" features. This is because major banks in the US and Europe are having problems.

The difference is that today more people know about Bitcoin than 10 years ago, although they may not all have positive views on it. The biggest challenge for crypto is that it is directly confronting the traditional financial system, Casey noted.

Similarly, angel investor and CoinDesk columnist Tatiana Koffman wrote in a post titled "Bitcoin is made for this moment" that if people continue to lose faith in banks' ability to keep their money safe, decentralized models like Bitcoin will become increasingly attractive.

What is the future for crypto and DeFi?

Bitcoin was created to eliminate intermediaries in payments, as an alternative choice to centralized fiat currencies. However, recent events such as the collapse of Silvergate and Signature banks, which are closely related to cryptocurrencies, have led to heightened scrutiny and strict sanctions from the US governments, according to Dr. Binh Nguyen Thanh.

Therefore, the current situation is a "complex power struggle," pushing governments to accelerate the creation of new rules for cryptocurrencies. The collapse of banks in the US and Europe in recent times has highlighted the importance of separating payments from the fractional reserve banking system (i.e., traditional banking institutions that always hold only a small fraction of their customers' money and use the majority of the remaining cash for lending and other investment activities).

Stablecoins are the opposite story as they solve the inherent problem mentioned above of traditional banks, and because stablecoins are an integral part of DeFi (decentralized finance), due to their nature of facilitating direct transfer between users and platforms without the need for fiat conversion, the future may be full of excitement and events for both crypto and DeFi.

"After the recent development of the traditional financial market, we have seen the value that DeFi can bring more clearly. In the next decade, DeFi will continue to be improved. In the short term, DeFi will be applied more in places that are not tightly regulated or have a wide legal framework for DeFi,”

Dr. Binh Nguyen Thanh 

However, he noted, these experiments will face problems and hopefully achieve. Technologies such as ZKP (Zero-knowledge proof) can promise to increase privacy and security, but I think these features will be more necessary in the future than now.

If we recognize the potential of DeFi more clearly now, I hope that in 5-10 years, if the financial system encounters major problems, DeFi can become a suitable alternative that billions of people can use. Until then, we need to continue building DeFi"

Dr. Binh Nguyen Thanh

In a related comment, renowned investor Tim Draper (who invested at just the right time in companies like Coinbase, Twitch, Hotmail, and Tesla) simply said: "The SVB failure was a wake-up call for the people who have been reluctant to buy Bitcoin".