Bitcoin Emerges as Safe Haven as Traditional Finance Faces Turmoil

Conflicting data creates the question of how the Fed will react to both rising inflation and failing banks - and whether bitcoin will be a lifeboat.

AccessTimeIconMar 22, 2023 at 5:40 p.m. UTC
Updated Mar 22, 2023 at 8:27 p.m. UTC

Bitcoin has regained its luster as digital assets outperform following traditional finance’s (TradFi) recent turbulence. With the collapse of Silvergate, Silicon Valley Bank (SVB), Signature Bank and most recently Credit Suisse, cryptocurrencies appear to have become a safe haven among the mismanaged TradFi establishment.

On March 8, rumors of trouble at SVB caused digital assets to become entangled in the situation. The announcement that $3.3 billion of Circle's dollar-backed USDC stablecoin was held at SVB caused the stablecoin to depeg from the U.S. dollar.This led to digital asset investors selling positions on major exchanges. Bitcoin dropped from 22,410 to 19,500, and ether slipped almost 200 points from 1,560 to 1,368, breaking below its 200-day moving average momentarily before recovering.

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By Friday, March 10, news of the largest bank failures since 2008 had consumed financial media outlets, and banking indexes plummeted on fears of widespread contagion. The S&P Regional Banking Index (KRE) lost over 28% in roughly five trading days, and has yet to recover.

SPDR Regional Banking Chart

On March 12, the Federal Reserve and Federal Deposit Insurance Corporation announced they would insure the deposits of the failing banking institutions to prevent a deeper run on banks and quell fears of contagion. The actions were clear enough to stop a major failure but not enough to keep depositors from withdrawing billions of dollars. Ironically, the major winners in this recent debacle have been risk assets, most notably digital assets like bitcoin and ether.

While correlations between the stock market and digital assets have always remained in flux, one of the most consistent predictors of crypto prices has been the global money supply. This recent bout of bank insolvency has created a new mandate for central banks to stop the bleeding by printing more cash.

The chart of M2 and total crypto market cap says enough about how liquidity affects the net demand for digital assets. If the current rally since March 11 can be trusted, crypto is predicting that central banks are going to have to keep printing to avoid (another) financial crisis.

Global M2 Deviation

Not surprisingly, this deterministic view of M2 = “bitcoin go up” isn’t as simple as it seems, as the Federal Reserve still has to compete with rising inflation, and hot unemployment levels. On March 10 payroll numbers came in above expectations, and just four days later the consumer price index showed a 0.5% increase in inflation. Neither of these figures has helped Chair Jerome Powell fulfill his mandate, but they have put pressure on the Fed to continue raising rates.

The conflicting data creates the question of how the Fed will react to both rising inflation and failing banks. Printing has already begun, but rate hikes would only exacerbate the problem, causing more banks to fail.

A look at the rate hike prediction since March 6 paints a good picture of how rapidly the situation is evolving.

Interest Rate Probabilities

What was widely predicted to be a year of higher for longer rate policy has shifted drastically to pause, and ultimately pivot, in the coming quarters. Policy anywhere in between is possible at this point. The Fed’s “dot-plot” forecast released on March 22 will provide a critical window into the confidence of Federal Open Market Committee members as they try to anticipate how effectively central banks can navigate hot macro data while safeguarding financial institutions.

In the middle of all this confusion sits crypto, which has steadily rallied and is now seen by many investors as a bulwark against another financial crisis. But can digital assets fully escape the trajectory of economies in decline? Should a banking crisis, inflation or further rate hikes deliver the hard landing that many assume is inevitable, will bitcoin be the escape pod?


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Nathan Cox

Nathan Cox is the chief investment officer at Two Prime.