Banking volatility causes crypto rally but won’t end crypto winter

As the banking sector experiences volatility, investors are looking for a safe haven. But is crypto the answer?
Bitcoin has seen a significant rally in the wake of Silicon Valley Bank’s collapse. The price of Bitcoin has climbed from $20,447 on the morning of the bank’s collapse to $27,818 at the time of writing.

While the practical implications of the bank’s collapse are still being assessed, the theoretical driving force behind the Bitcoin rally is clear. According to GlobalData, the rise in Bitcoin’s price is a result of investors looking for a safe haven.

Banking volatility causes crypto rally but won’t end crypto winter

The original purpose of Bitcoin was to provide an alternative to fractional reserve banking – a decentralised payment system designed to eliminate the need for centralised trust,” he said. “So naturally when contagion spreads among big banks, their headwind can become crypto’s tailwind.”

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The founding principle behind Bitcoin was giving the citizen greater control over their money through a decentralised system. In fact, the first block in the Bitcoin blockchain – which is called the genesis block – was mined on January 3rd, 2009, just a few days after the global financial crisis began.

However, if the rally continues, Muru believes that institutional investors may start viewing Bitcoin as a short-term safety measure to limit exposure to deposit risks from banks.

“I don’t see it being an end to the crypto winter,” said Muru, adding that the consensus within the cryptocurrency ecosystem is that a high interest rate environment was the first domino in the crypto winter because it killed risk-on trading and plummeted the crypto market cap.

“It seems awfully convenient to now call Bitcoin a ‘safe-haven’ asset because interest rate hikes hit centralised banks in a comparatively worse way,” said Muru.

In addition, the crypto ecosystem has its own investor confidence crisis following the collapse of one of the world’s biggest crypto exchanges, FTX. In March 2023, Silvergate, a lender to crypto companies including FTX, announced bankruptcy.

The long-term beneficiaries of this regional banking volatility – particularly in the US – are yet to be seen.

As investors become increasingly worried about the stability of regional banks, they are moving their money to some of the largest and most well-known multi-national banks. JPMorgan, Bank of America, Citibank and Wells Fargo are all seeing a significant influx of new deposits as nervous investors seek to protect their money.

Stephen Walker, GlobalData fintech thematic analyst, says that this is part of a larger trend of investors moving towards safer options: “In terms of the wider sector there will be a flight to quality as bigger banks soak up deposits and credit will be less available and only extended to low-risk borrowers.”

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