How bitcoin could emerge victorious amid the global banking crisis

As the world grapples with a banking crisis on the brink of chaos, the Federal Reserve (Fed) has taken drastic measures to pump liquidity into the market., The initiative has led to an unexpected response from the crypto market, especially bitcoin.

The Fed’s balancing act between tightening and loosening monetary policy, amid rising interest rates and a string of bank bailouts, has left many investors questioning the safety of their assets.

Banking crisis goes global

In the United States, several banks, including Silvergate, Silicon Valley Bank, Signature Bank, and First Republic Bank, have come under extreme stress, requiring government or private market intervention. But the crisis has not been confined to America.

European banks such as Credit Suisse and Deutsche Bank are also struggling to stay afloat.

bitcoin btc banking crisis
Silvergate, Silicon Valley Bank, Signature Bank, First Republic Bank, Credit Suisse, Deutsche Bank and Bitcoin. Source: TradingView

Governments and central banks around the world have taken steps to ease the crisis by providing liquidity.

The Federal Reserve, the FDIC and other organizations have lobbed the “monetary bazooka” at troubled banks in the US. The move has seen the Fed’s balance sheet add $400 billion in just two weeks.

This sharp increase has effectively negated the 64% progress made in quantitative tightening over the past year.

federal reserve balance sheet
US Federal Reserve Balance Sheet. Source: US Federal Reserve

However, the market remains uncertain about the Fed’s strategy. While interest rates continue to rise, massive liquidity injections have confused the market.

Torsten Slok, Partner and Chief Economist at Apollo, Is said that the spread between interest rates on fed funds and checking accounts is “the fundamental reason why money is moving out of bank deposits.”

Slok believes that this growing divergence is “highly unusual compared to previous banking crises, where the source of volatility has typically been credit deficits.”

Federal Reserve Interest Rates Banking Crisis
US Federal Reserve funds against interest rates. Source: Apollo Global Management

Bitcoin Flourishes Amid Psychological Awakening

As a result of this uncertainty, many investors have turned to alternatives such as bitcoin, gold, and real estate. Growing concerns about the security of traditional banking have caused a “psychological awakening” in the bitcoin community.

This, combined with the desire for higher returns, has led to an inflow of money into money market funds and other non-deposit assets, putting further pressure on the banking system.

Economist Nouriel Roubini confirmed that depositors are beginning to realize that “they can earn 4% on safe short-term T-bills, while they get close to 0% on bank deposits.” It serves as the primary driver for the ongoing bank run.

The era of banks profiting from free deposits is coming to an end, According to “Dr.Om, Roubini concluded that the responsiveness of deposits to interest rate changes is accelerating significantly.

bitcoin btc t-bills real estate gold
Bitcoin, Gold, Treasury Bills and Real Estate. Source: TradingView

Despite the dire situation, experts believe the banking crisis will eventually resolve, with governments and central banks working tirelessly to prevent bank failures in the US and internationally.

Christine Lagarde, president of the European Central Bank, said at a press conference after announcing a 0.5 percent hike in deposit interest rates:

“Under the baseline, the economy looks set to recover in the coming quarters. Industrial production should pick up as supply conditions improve further, confidence continues to improve, and companies work through large order backlogs. Rising wages and falling energy prices will partially offset the loss of purchasing power that many households are experiencing as a result of high inflation. This, in turn, will support consumer spending.”

Nonetheless, efforts to stabilize the system are likely to add to other inflationary pressures and further increases in food prices.

global price of food index
Global price of food index. Source: Fred

Meanwhile, investors are increasingly diversifying their portfolios and turning to alternatives such as bitcoin. Over 4.28 million bitcoin wallets have been created on the network, with a balance of 0.1 BTC or more.

As the world continues to navigate this financial minefield, it is clear that a younger generation is more inclined to trust software-driven solutions over human-led systems.

Bitcoin addresses with balance greater than 0.1 BTC. Source: Glassnode

Investors should closely watch the central bank’s reactions. Similarly, developments in Europe and other affected regions may shed some light on the unfolding of the global banking crisis.

The trend toward a debt-based economy and a fractional reserve banking system suggests that, over the long term, alternative assets like bitcoin may emerge as the biggest winners.


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