Summary Bitcoin has had a very volatile (and negative) past year. However, in the short term, it has performed extremely well. I view this as critical for why some may want exposure to it and other cryptos. When the market is hit with turmoil, to see it performing well is part of the point. The recent moves have stemmed from a lack of public trust in the U.S. and perhaps European banking system. As deposits appear less safe at smaller institutions, anti-establishment plays have rallied. I personally view this as short-lived since the Fed and the U.S. government are going to work to restore faith in credit markets and the banking sector. While that faith has helped crypto rally, it negates some of the fundamental reasons for owning it as a contrarian play. Main Thesis & Background The purpose of this article is to discuss the broader market and its implications for Bitcoin (BTC-USD) and other cryptocurrencies by extension. This is timely because, as readers are surely aware, this has been a challenging few weeks for the broader market. The biggest concern stems from the failure of SVB and subsequent risks of contagion in to other banks and the global banking sector. Yet, over this same time period, the price of Bitcoin has rallied: 1-Week Move (Bitcoin) (Coinbase) Looks great right? Probably time to jump right in and ride this wave? Well, before you do that, consider that a 1-week snapshot doesn't tell the whole story. While this price action is undoubtedly great for holders of the asset, consider performance over the past year. Not too pretty: 1-Year Move (Bitcoin) (Coinbase) This may be hard to make sense of. It certainly is for me, to a degree. So for this review I decided to dig in to what is going on with the market, how BTC is reacting, and why I don't see the recent gains as sustainable. I do see a case for further gains here, but only for those who are truly risk-taking and willing to take some profit when it emerges. Over the longer term, I think sentiment is going to balance out, as sentiment and confidence in the U.S. banking system is likely to rise again with time. Bank Failures And Then Federal Support Catalysts For Gains To begin I will focus on the biggest story for the market - crypto, equities, bonds or otherwise - at this moment. That is certainly the failure of Silicon Valley Bank and Signature Bank, followed by the general sell-off of the banking sector on the fear that more banks could follow. This impacted crypto negatively at first as well, as these banks were lenders to the industry. However, I see the general fear by consumers and decline of trust in banks as a whole as a potential reason why BTC has been rallying. This may sound counter-intuitive, but that was what I meant with the title of my article. When people lose faith in "the system" - by that I mean the U.S. banking and financial system - that can provide justification for owning non-traditional assets like cryptocurrencies (Bitcoin or otherwise). To understand how real this decline in sentiment is, let us look at the University of Michigan's consumer confidence index. While this does not consider only banking, it does speak to the general mode of the public which has been hammered by these bank failures: Consumer Sentiment Levels (Monthly) (U of Michigan) What I am getting at here is that when the public starts to lose confidence in banks and the regulatory environment as a whole, it starts to lend credence to the currency skeptics that crypto rely on. My point being that when consumers get anxious it can work in two ways. One is that they flee to safety, a normal course of action in my mind. But over the past few years there has been another alternative for people who have lost trust in the USD and other popular currencies. They can move in to the idea of de-regulation and generally unregulated currencies like Bitcoin and others. It is a way to express distrust and rebel against the current "system" and continues to grow in popularity and go more mainstream. In fact, despite the risky nature of this sector, we have seen some signs of stabilization. The total market cap of the crypto market, while down in the last few years, has stabilized over the past nine months: Total Cryptocurrency Market Cap (World Bank) This could be another reason investors are flocking back in to crypto. While it is still a very volatile asset, it is getting more stable and well known in relative terms. Comparable to stocks, bonds, or traditional currencies? Of course not. But it is getting more legitimate so that helps underscore the rush of confidence in it when good news comes out. Part of that good news actually stemmed from the bank failures themselves. The ultimate push by regulators and the U.S. government to protect investor deposits at these failed institutions helped restore confidence in assets under custody more broadly. While I personally don't see the optimism on the behalf of crypto investors as entirely justified, it is there nonetheless. The ultimate conclusion here is that if investors feel their money is safe - whether in savings accounts, investment accounts, or crypto accounts - then asset prices are going to be supported and likely to rise. My Concern: Bank Failures Are Not That Rare So I laid out why investor interest in BTC is starting to spike. But are those reasons justified? Personally, I don't think so, and won't be using the recent momentum as a reason to buy. The logic here is simple. Bank failures are really not that rare. This is not to minimize the challenges facing the sector in the short-term. A bank failure is never "good" and the risk management failures and subsequent response by the government are not encouraging signs. So their anxiety and anger from the public as a result have plenty of merit. But the point I am making is this is not something that is going to have long lasting ramifications because it is not an unprecedented event. Banks have failed before, and will fail again. The economy has survived these before thanks in part to FDIC insurance programs that prevent a bad situation from getting out of control (generally). For context, consider that while bank failures have been fairly infrequent in the past few years, that has not been the case over longer periods of time: Bank Failures Over Time (FDIC) The conclusion I am drawing here is not to make any dramatic portfolio changes as a result of SVB, Signature Bank, or even if another bank goes under. If crypto was right for you before, then it probably still is now. But the opposite is also true. The market is going to recover from this crisis as it has in the past. To use this cycle as a reason to dive in to an asset like Bitcoin is probably ill-advised. That is my two-cents at least. If Worried About Bank Failures, Bitcoin Probably Is Not The Answer Expanding on the point above, I think the idea that crypto balances are "safer" is misguided anyway. For support, let us look to Celsius' own terms of service, which is a now bankrupt crypto lending company. The security of customers' digital assets didn't appear to be a primary concern of theirs: Celsius' Terms of Service (Celsius) in this respect we see the crypto industry has a general lack of safety that we come to expect (and demand) from bank and savings accounts. Investor protections are lacking due to a lack of regulation or oversight body. Does this mean your funds are just going to get stolen overnight? Probably not. But it does limit the recourse one has if there are problems. Celsius' own website called the deposits "unsettled" and "not guaranteed". If this doesn't scream "red flag", I don't know what does. The takeaway for me is that shifting to this sector or taking a less traditional approach due to there being temporary uncertainty in the U.S. banking sector is misguided. I would caution readers from taking on too much risk in this climate, you may end up getting more than you bargained for with a new approach. What Could Push BTC Higher? I have taken a fairly negative tone with respect to Bitcoin's rise in this review. But I am not a complete bear here for a couple reasons. One, momentum in crypto can often be hard to squash immediately, so the good times could roll on from here for a while. Two, investors and households have a lot of cash (and cash equivalents) on hand at the moment. In fact, money market balances are currently at their highest in history, as shown below: Money Market Balances (Total) (Bloomberg) This does not automatically translate to a bull or bear case for Bitcoin specifically. But it does mean there is money out there that could be put to work at a moment's notice. It would be naive on my part to think that some of this liquidity won't make its way in to Bitcoin, especially since the recent gains have got to be intriguing to a lot of people - myself included. Any asset class that is out-performing stocks and bonds by the magnitude Bitcoin has in the short-term warrants at least some consideration. What I see here is a relatively bullish case for most risk-on assets. Now that stocks have sold off, there is a much stronger argument for buying back in than there was a month ago. With all this cash on the sidelines, I see some risk taking as a likely outcome, and Bitcoin is one place that could happen. It won't be for me personally, but this is a trend that isn't going away, even I can recognize that! Banking Concerns Fuel Prospect For Less Hawkish Fed My last thought touches on another output from the banking sector fallout over the past few weeks. This is the belief the Fed is going to back off on its rate-hiking plans and may even begin to cut rates by year-end. The rationale is that the banking sector has pressured the market and caused a bit of a panic, so the time to ripe to ease off the gas. Whether that is going to happen or not is up in the air, but the futures market certainly thinks it will: Funds Rate Expectations (Charles Schwab) This speaks to a key fundamental for BTC's recent rally. The resulting higher interest rates from the Fed over the past year has meant safe-haven assets like Treasurys, bonds, and dividend-growing stocks became more attractive because their yields have increased (new debt issues saw higher yields and dividend growers see their yields rise if all other things are equal). This meant a more risk-off mode has ensued, hurting BTC. Now, the opposite could be true. What has gone down due to Fed rate hiking could be due for a rebound when the Fed stops its current trajectory, or even reverses it. That includes bitcoin. So, again, there is a clear path forward here under the right circumstances, but readers have to be very careful with how they approach it. A lot could "go wrong" with this thesis. Bottom-Line Bitcoin has been on a run lately and that certainly piques my interest. But at this juncture, I have to pass because I think the euphoric sentiment is going to smooth out once the negative banking headlines are replaced. That is not to say I won't get in at some point - it is an area I dabbled on in the past. I bought in initially in the mid-40k range and watched my position climb to the mid-60k mark. Unfortunately, I didn't lock in profits then and ended up existing when the price went back down to my cost basis. So I am one of the few crypto writers who will admit to not making any profit in this sector. Yet, I will be vindicated given the collapse in price that has resulted since then. Looking ahead, I may reconsider if the sector takes an unjustified hit. But I don't believe in the long-term story of crypto at this point with enough conviction to plump down a whole bunch of cash there just because equity markets are rattled. I will consider any asset that could make me money at any time, but I don't like the risk-reward trade-off now. As a result, I caution readers to take BTC's recent rise with a grain of salt, and be selective with new positions going forward.
