Is the banking collapse playing into cryptocurrencies' hands?

Different countries, different banks - and the same end result. The crash of Silicon Valley Bank in the U.S. sucked several regional U.S. banks into the downward spiral and made investors around the world prick up their ears at even minor turmoil. Once considered stable and one of the most important financial institutions in Europe, Switzerland's Credit Suisse has lost confidence in recent years - the collapse of SVB finally sent it reeling. The prices of various bank stocks plummeted as a result. Some cryptocurrencies also recorded brief losses - even stablecoins like the USDC, which is otherwise considered relatively stable because it is supposed to reflect the value of a single U.S. dollar 1:1, fell to 92 cents. However, after just a few days, the majority of cryptocurrencies rose significantly again. Will digital currencies continue to gain momentum?

Crash causes share price to rise not only in the short term

"The recent collapse of several regional banks has raised fears about the stability of the financial system and led to negative reactions in the markets. In uncertain times, investors tend to take fewer risks, which often leads to a flight from risky assets such as cryptocurrencies," Strauss-Frank explains the initial price weakening. However, he says this is more likely to be a short-term reaction to what has happened, as the crash would reinforce distrust in banks in the longer term and move investors to alternative forms of investment, with a general interest in digital currencies being observed: "Since the beginning of the year, the Bitcoin price has been on an upward trend." Especially as measures taken by the Fed to combat a new financial crisis, such as increasing the size of its balance sheet, have eased liquidity concerns among some investors. "Also, because U.S. government bond yields are falling, investors looking for alternatives are now increasingly interested in riskier assets again, such as growth sector equities and also cryptocurrencies. All of these factors combined have created a favorable environment for risky assets, including bitcoin, for example," Strauss-Frank said.

All that glitters is not gold?

Despite a continued upward spiral, the banking collapse is unlikely to leave digital currencies unscathed. "Cryptocurrencies are dependent on a number of factors both inside and outside the cryptocurrency market," Strauss-Frank says, also hinting at the Fed's influence. Between the banking crisis and inflation, the Fed was recently faced with the difficult decision of pausing interest rates in favor of the tense sentiment in the banking sector or continuing its course with another rate hike in order to fight inflation - which in turn may also have an impact on investors' investment behavior. Strauss-Frank likewise points to the aspect that digital currencies often lack regulation and oversight, making it difficult for investors to properly assess the risks involved. "Especially since it is a question of one's risk type whether someone sees crypto as an investment in a risky asset class, or as a true alternative to the bank where one can invest one's money in a decentralized and potentially safer way - which is partly indicated by Bitcoin's recent price rise," she adds, but at the same time warns, "Regulatory factors in particular will play an important role in guiding the cryptocurrency market in the coming weeks and months. Such a factor to keep an eye on is the U.S. Securities and Exchanges Commission (SEC), which is actively cracking down on fraudulent Initial Coin Offerings and scrutinizing crypto exchanges. Any new regulation or enforcement action by the SEC could affect investor confidence and potentially lead to price volatility again."

Even stablecoins not stable

Because digital currencies are always subject to such fluctuations and remain in a higher risk category, some investors prefer the so-called stablecoins, as Strauss-Frank explains: "The idea behind stablecoins like USDC is that they offer the advantages of digital currencies, such as a fast and cheap transaction, but avoid the volatility that is, after all, typical of many other cryptos." While the recent "decoupling" due to banking sector turmoil was short-lived and relatively minor, it did raise doubts about stability and may have drawn wider implications. After all, if USDC had $3.3 billion in deposits with SVB that were frozen at the start of the bust, the domino effect occurred: after the coin value fell below one U.S. dollar, crypto exchanges Binance and Coinbase suspended the conversion of USDC into Binance USD (Binance's own stablecoin) and dollars, respectively. Investors simultaneously tried to limit their losses and exchanged their USDC for other stablecoins such as Tether, whose price shot up by ten percent as a result.

All-clear is in the air

If past events caused many investors invested in bank stocks to briefly panic, Strauss-Frank points out: "If you're a small investor with long-term goals in mind, the bankruptcy of SVB should be more of a short-term issue. The crisis seems to be limited to smaller banks and not a systematic problem. The financial sector and the market as a whole will likely be volatile in the near term, but there are no significant spillover effects on the banking system or the global economy." This is because both cryptocurrencies and the banking sector have been subjected to regular stress tests in recent years, some of which have been well managed, he said. "Accordingly, it is important not to forget to diversify the portfolio," Strauss-Frank emphasizes in conclusion.

Source: Freedom Finance