Bitcoin is not a store of value, banks are safe until…

Key facts:

  • Within a few days, Bitcoin went from $19,900 to $26,000.

  • Bitcoin shines on the prospect of systemic risk in the banking system.

Just a few days ago, commercial institution Silicon Valley Bank filed for bankruptcy. The bank has about US$209 billion in financial assets (mortgage loans and treasury bonds), and only about US$175.4 billion in liquid deposits. Due to the run on, it cannot meet the withdrawal needs of users, resulting in insolvency.

Silicon Valley Bank was formerly Silvergate Bank and later Signature Bank. Today, many North American citizens and companies dread receiving the cake they think belongs to them, but is just their cake. A sense of systemic risk pervades the atmosphere in the US banking sector.

What you don’t know about the banking system

Do you remember when was the last time you opened a bank account? The sterile surroundings, the gleaming pillars and wood of the desks, the human touch of the suits, the feeling of being in the cold comfort of an airplane cabin.

You feel like an adult, grown up, and it matters: This is your first account or one of many bank accounts. Never mind: that’s why you were there that day, seriously. The business advisor hands you a series of documents, which you sign without paying much attention, enjoying the convenience of a new account beforehand. That’s it. You enjoy its benefits for years.

One day, out of the blue, your “trusted” bank goes bankrupt and the bank contact ensures that you will receive a proper refund. Months passed, but nothing happened. What happened to your money, your silver? Where does your hard earned money go?

You may have forgotten to read the fine print of the contract you signed. Let me explain: Once you deposit money into that account, it is no longer yours. Technically, your money has been held by two people at the same time since then. You and the bank, or you and an unknown borrower.

Of course, your savings amount remains the same when looking at your account. You didn’t gain a dollar, but your balance didn’t decrease either. “If I can see it in my account and withdraw it whenever I want, why isn’t it mine?”, you say. Well, the numerical amount you see in your account is nominal; in other words, it’s a number that represents how much you’ll get when you split the pie, not how many pieces you actually own.

In fact, the bank may use your money to go shopping. Without your knowledge, you could be funding their business with money deposited into their “care”. This makes you neither a customer nor a saver. That makes you a lender, after you’ve spelled it out. As it turns out, the bank didn’t do you a favor; it was you who lent the bank the money.

It is possible for the bank to buy things with your money because the current financial system allows the application of what is called “fractional reserve”. With this method of using deposits, banks are not required to keep 100% of client funds in reserves.

This means that if a certain number of customers want to withdraw an amount greater than the bank’s current reserves, the bank will not be able to give everyone their share of the pie. Someone is going to lose their assets: it could be you, someone else, or the bank itself if it decides to liquidate its assets, go bankrupt and pray for a central bank bailout which eventually inevitably leads to monetary inflation. Someone always loses.

In your case, you can cash out your share, as long as the crowd doesn’t think of cashing out at the same time as you. As long as there is no bank panic event, you can recover the parts that touch you.

And Bitcoin? It has rallied more than 20 percent since news of the bank run broke, from $19,900 to $26,000, reinvigorated by sucking the blood of traditional banking like a vampire. Other cryptocurrencies have also been accompanied by bullish rallies, and these decorrelations with stock and bank indices can be temporarily observed. A very different story than the one that the bank action has been playing out, with losses of up to 60% in a matter of hours.

Attached to the tweet is a table showing the decorrelation between Bitcoin and banking behavior.Source: Twitter

Compared with the decline of the banking market, the rise of Bitcoin is ironic: In recent years, U.S. regulators have questioned the safety of cryptocurrencies as investments, while banks and traditional assets have also been questioned. Describe them as stable and secure institutions. However, it turns out that many people are looking to Bitcoin as an asset they can take refuge in the face of a crisis in the financial system.

Shouldn’t coherent regulation stop not only cryptocurrency companies, but banks from speculating with customers’ money? Cryptocurrency exchanges and traditional banking, FTX and Silicon Valley Bank, don’t seem to be that different after all.

But Bitcoin is different. Its price action in recent days suggests that it is doing quite well against the greenback and that it is moving higher in a difficult macroeconomic situation when holes in traditional finance appear. Now, then, is a good time to reread the Bitcoin whitepaper, fully translated by CriptoNoticias, to learn about the fundamental value that encourages people to appreciate the asset. There are few more urgent readings to make sense of the events of the past few days.

Disclaimer: The views and opinions expressed in this article are those of its author and do not necessarily reflect those of CriptoNoticias.

Source of information: Compiled from CRIPTONOTICIAS by 0x Information.Copyright belongs to the author Paulo Márquez, without permission, may not be reproduced

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