As the media in the US gathered around the Silicon Valley Bank that collapsed last week, an ardent Bitcoin supporter seized an opportunity. He drove a truck in front of the building’s entrance and showed the cameras the sticker on the side of the vehicle that read: “BE YOUR OWN BANK”, with Photo of Federal Reserve Chairman Jerome Powell.
● The CEO of the largest investment body in the world analyzes the reasons for the collapse of the high-tech bank
● The shockwaves also reached the crypto industry and undermined the second largest stablecoin
In the last few weeks, the crypto community, and in particular the holders of Bitcoin, can relax in front of the traditional investors with a kind of “we told you so” sigh. After one of the worst years in the industry, Bitcoin is “getting back on track”, jumping to a value of more than $27,000 per coin. The price of the digital currency is still significantly lower than its price in October 2021, when it touched the $67,000 mark (160% higher than its current price), and it is still an impressive recovery, certainly against the weakness in other markets in recent times.
For years, supporters of Bitcoin have waved at the main advantage over traditional currencies: protection, at least theoretically, against inflation and erosion of the currency. The amount of Bitcoin coins is limited (to the extent of 21 million coins at the end of the mining period), and there is no central bank that may deal with the weakness in the market by “printing money” to weaken it. And when the central banks printed money to overcome the corona virus and more, the bitcoin celebration reached its peak and convinced quite a few investors that the new currency would protect them from the inflation that would come.
But in retrospect, the declines in the capital markets in 2022 did not pass over the digital currencies and the past year was characterized by a market that reacted in the same way as the traditional market, instead of being an alternative to the classic shares.
That is, until the beginning of 2023. From the beginning of the year, we see as mentioned that the decentralized currency begins to move in a way opposite to the trends going on in Wall Street, and perhaps finally provides protection and hedging for investors who seek to diversify the investment portfolio. While the Nasdaq and S&P500 indices went down and up alternately, the Bitcoin currency soared.
Since the beginning of the year, Bitcoin has jumped by more than 63% and in the last week, when banks in the US collapsed, including one crypto bank (Signature Bank), Bitcoin climbed by more than 13%, a surprising trend in view of the fact that in the previous crypto collapses, Bitcoin actually fell.
The last few weeks have raised renewed hope that Bitcoin has returned to being the “new gold”, a way to hedge risks against the stock market, but Adam Bennion, a founding partner at the Collider Fund, estimates that this is a temporary phenomenon. “I don’t think we really got out of sync with the shares,” he says. “From time to time we see that there are deviations in the crypto market and it is known to be very volatile. I think we will see a return to the trend as we are used to seeing it and in a broad view the crypto market will return to correlation with Wall Street.”
The year they eulogized cryptocurrencies
In fact, 2022 was a year the crypto community would probably prefer to forget. The FTX crypto exchange collapsed in a case that is still ongoing in various courts in the US, stable currencies also collapsed, and the leading currencies such as Bitcoin and Ethereum fell by tens of percent. There were those who eulogized the crypto industry and estimated that it was another passing trend in the capital market – until 2023 arrived.
Although other decentralized currencies such as Ethereum are also soaring in recent weeks, the gains are led by the popular currency in the field – Bitcoin. “It is the most decentralized currency currently on the market,” explains Ilan Shtrak, CEO of Horizon from Beit Altshuler Shaham. “It does not rely on a third party, was not issued by a particular company and actually serves as a kind of anchor in the digital currency system.”
According to a review by the “Coindesk” website, the rally in Bitcoin is not happening despite the collapse of the banks in the US, but because of it. “The collapse of the banks that are not related to Bitcoin is wonderful news for Bitcoin,” the article reads. “When the traditional system weakens, the decentralized currency strengthens Additionally, when stable currencies collapse, those that guarantee a solid dollar-to-currency exchange rate, investors switch to another currency.
Stark also says that cryptocurrencies are gaining strength as an investment alternative when traditional institutions cease to be as reliable as they used to be.
According to some estimates, the authorities in the US may take a harder hand against entities that deal with crypto – such as the closed banks Silvergate and Signature – than other financial entities that have fallen into difficulties such as Silicon Valley Bank. the risk in traditional institutions arising from investing in decentralized currencies.
The connection between the crypto rally and the Fed interest rate
Another factor that affects the increases in crypto is the central bank in the USA, the Federal Reserve. The collapse of the American banks and the fear of a financial crisis strengthened the estimates that the Fed will moderate the interest rate increases, and some estimate that it will even stop them. Banyon explains that these forecasts send investors back to high-risk assets – Like Bitcoin: “The interest rate stops and the Fed reduces the supply of bonds it issues. People should turn in that case to other places to maximize their returns. The anticipation of these actions brings more money to less secure options and potential investors turn in this case to the riskier digital currencies.”
On the other hand, Stark actually thinks that the Fed’s interest rate hikes and cryptocurrencies move on two parallel axes. “The Fed’s decisions have no direct connection to the currencies because they are external to the accepted currencies,” he says. “The currencies are alternatives to traditional investments and therefore strengthen after the collapse of the banks.” According to him, the interest rate increases did not affect Bitcoin and other decentralized currencies in the last year.
How did the collapse of FTX affect the industry?
What has changed since the collapse of the FTX crypto exchange last November, which dragged Bitcoin to a low of $16,000? “The collapse of the stock market can be a positive thing in the long term,” says Stark. “The market is more cautious and supervised, and in the long run this is a positive thing.”
According to Benyon, “the crisis of the FTX exchange was external to the crypto market itself. It obviously affected it, but it did not stem from a problem with the currencies themselves.” he explains. “Therefore, there is really no market recovery here.”