The Monthly Report

Bitcoin and Markets - Mar. 2023

Banking Contagion

Macro focus shifted away from trading markets in March and fixed itself on the banking industry instead. Some thought “contagion” was a new buzzword reserved for the crypto space but it’s applicable to traditional finance too.

In early March, the second largest bank collapse in US history happened. Silicon Valley Bank (SVB) experienced a $42 billion bank run as customers raced to withdraw funds from what was a renowned, 40-year-old, financial institution in the tech, startup, and commercial space.

How’d it happen?

• poor risk management

• SVBs strategy vs. the Fed

• and… panic

SVB’s downfall wasn’t a shock to everyone. It, along with another now shuttered bank, Signature Bank, were among the 20 most-shorted regional bank stocks.

Silicon Valley Bank had an unusually high number of uninsured depositors. Why? The bank specialized in serving tech companies, venture firms, and startups. These are high-dollar depositors with large balances above the $250,000 Federal Deposit Insurance Corporation (FDIC) threshold. The bank also had heavy exposure to long-term Treasury securities. The Fed’s fight against inflation, leading to rate hikes, meant that SVB’s bond portfolio continued to take hits.

They were on the brink. A few people spotted this then, once word got around, a bank run ensued.

The immediate spillover effects impacted the likes of Signature Bank too and in Europe, we saw the ongoing saga with Credit Suisse come to a head, ultimately resulting in a takeover by rival UBS.

What about bitcoin?

Bitcoin rallied in March.

Amidst the banking turmoil last month, the world’s largest cryptocurrency jumped almost 20%. We don’t always see bitcoin and other risk-on assets deviate from traditional markets but this time it did and it do so in fine fashion. Bitcoin asserted itself in March, rising off of positive sentiment around its core value propositions.

• self-sovereignty

• transparency

• scarcity

Bitcoin vs. Banks?

I’ve long believed that bitcoin isn’t necessarily competing with the traditional financial system but that it does provide financial optionality that previously did not exist. There also doesn’t appear to be a way to replicate bitcoin’s key properties in the traditional system.

Banks are, by nature, trusted third parties. Even with insured deposits, customers are trusting both the bank and the government or other insurance bodies in the event of a bank run like we saw at SVB.

In bitcoin, there are no trusted third parties. Individuals buy, sell, and hold bitcoin themselves, with complete ownership over their funds 100% of the time. That’s the beauty of it. There’s a catch though…

That complete ownership over funds puts the security of those funds on you. It’s a trade-off but it’s easier to see the value in it at times like these.