Bitcoin Up, Banks Down: What’s Up?

You may have noticed that Silicon Valley Bank collapsed last weekend. Silicon Valley Bank is the 17th largest bank in the United States and is a bank focused on venture capitalists and technology startups. In total, the bank manages more than $200 billion in assets. This weekend, the Federal Reserve, the FDIC and the U.S. Treasury jointly decided that the bank was too important to fail.

In this case, it doesn’t mean they keep the bank afloat itself, but they guarantee all the assets of SVB’s customers. Starting today, everyone can “just” use their money so they can continue to pay salaries, suppliers and other matters. With this, the US authorities prevented a domino effect, but something special happened.

The price of Bitcoin and other risky assets skyrocketed. How are investors celebrating when a giant US bank is under threat of collapse?

what is going on?

2022 is still dominated by inflation and the Federal Reserve raising interest rates to fight inflation. With core inflation (the consumer price index minus food and energy prices) still at 5.6%, the Fed has yet to manage to push inflation toward its 2.0% target.

In this regard, at first glance the Central Arterial has some work to do. Until the collapse of Silicon Valley Bank, the market had many times the idea of ​​the Fed rising and tightening. The idea was also completely off the table after it became known that the U.S. government had guaranteed SVB’s assets.

Interest Rate Meeting_March 22_federal_reserveFigure 1: Current expectations for the March 22 rate meeting

The chart above shows current market expectations for the Fed’s March 22 rate meeting. The odds of a 0.50% rise last week are still around 80%, and now that chance has dropped to zero.

The market now expects a rise of 0.25% to 65.7%, with a neutral rate decision of 34.3%. That would mean no interest rate hikes, so the Fed would pause for the first time in this tightening cycle.

In short, the market no longer trusts the Fed. Fed Chairman Jerome Powell and his aides have long said they want to “do whatever it takes” to get inflation back to 2.0%. However, the market sees this as a moment of Fed collapse, which means a temporary loss of credibility and confidence in the Fed.

Fed Chairman Jerome Powell now has until March 22 to come up with a story and get things done. However, the market believes that the upcycle is now nearing its end, and this is immediately reflected in the prices of risky assets such as Bitcoin.

Bitcoin up 15.20%

At the time of writing, bitcoins are priced at $24,385 each, up 15.20% over the past 24 hours. In effect, the U.S. government’s decision to bail out the drama surrounding Silicon Valley banks meant the money printing presses were restarted. Which is of course weird at a time when you actually have to fight inflation.

As such, the market appears to be judging this moment as a capitulation by the Fed. Personally, I haven’t seen it yet. The Fed is likely to really bow its head from this point on, and may need to cut interest rates as early as March. But it is also possible that the U.S. government will just guarantee the SVB balance and the problem will be “solved”.

Probably after solving the problems of Silicon Valley Bank, the Fed will continue to rise until the financial system has problems again. In this regard, we should not rejoice too early.

In the long run, I expect the U.S. government to intervene more and more often and spend more and more money. We now see that the Fed cannot even raise interest rates to 5.0% before the financial system starts to creak.

fed capitulation

Therefore, the main reason for the rise of risky assets such as Bitcoin seems to be the “capitulation” of the Federal Reserve. Expectations that interest rates could fall in the near term are also evident in U.S. Treasury yields in the market. They are also all red today.

US treasuryFigure 2: US Treasury Yields

If the 17th largest bank doesn’t fail without government intervention, it’s certainly not over. We also now know that all of the Fed’s press conferences and statements are largely marketing. Almost everything they have said has not materialized since the rise in inflation.

First inflation will be a blip, then they will temporarily pull inflation back to 2.0%, then there is talk of a soft landing for the economy, but nothing seems to be working. Confidence in the U.S. central bank is slowly fading. The Fed was bluffing and now the whole market sees that they have bad cards in their hands.

In this regard, March 22 will be a very interesting moment. Then the Fed has to make its next interest rate decision, with Chairman Jerome Powell once again climbing to his podium. If the Fed does decide not to go higher, it could mean the next blow to the dollar and a positive development for Bitcoin.

Source of information: Compiled from CRYPTO-INSIDERS by 0x Information.Copyright belongs to the author Thom Derks, without permission, may not be reproduced

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