Bitcoin price skyrocketing amid banking chaos
Bitcoin has leapt by nearly 15 per cent as banking chaos grips the global financial system.
Bitcoin has leapt by nearly 15 per cent as banking chaos grips the global financial system.
The cryptocurrency was trading at $US24,272 ($A36,411) early on Tuesday AEDT, a rise of 14.85 per cent over the past 24 hours, according to CoinMarketCap.
From its recent low of just over $US19,700 ($A29,553) on Saturday, the digital token has soared by more than 23 per cent to reach a seven-month high.
Ethereum, the second largest cryptocurrency, has risen nearly 9.5 per cent over the past day, while other alt-coins also rode the wave higher.
“Bitcoin is rallying as financial stability risks sent Treasury yields crashing,” OANDA senior market analyst Edward Moya said in a note.
“In a scramble to avoid another massive bank run, federal regulators stepped in as some Americans grew sceptical of traditional banking. Bitcoin’s rally coincides as some of the banks with crypto ties come under tremendous pressure. Regulation is not just going to hit crypto, but also the banks.”
Mr Moya said bitcoin surge, the biggest one-day rise since the FTX turmoil, was “a sign that some investors believe that DeFi solutions support the case for holding cryptos”.
Banking chaos
The US banking system has been gripped in recent days by a series of convulsions that has seen the collapse of three banks and authorities undertaking extraordinary measures to reassure depositors.
It all began on Wednesday night with a liquidation announcement from the small regional Silvergate Bank, a favourite among the cryptocurrency crowd.
The California business was swept up in several crypto mishaps, particularly the implosion of exchange platform FTX, before facing a wave of sudden withdrawals.
Later that same night, medium-sized institution Silicon Valley Bank (SVB) announced it was facing a huge run of unexpected withdrawals.
SVB, a key lender to start-ups across the United States since the 1980s and the country’s 16th-largest bank by assets, had been hit by the tech sector slowdown as cash-hungry companies rushed to get their hands on their money.
SVB – along with other banks – was also dealing with the effects of the Federal Reserve’s policy U-turn as the US central bank has moved aggressively over the last year to counter inflation by hiking interest rates.
Banks typically borrow money under short-term instruments while loaning using long-term vehicles.
Ordinarily, this dynamic is beneficial because interest rates on long-term instruments are higher than those on short-term bonds.
But because of the volatility unleashed by the Fed’s policy pivot, there has been an “inversion” of the bond yield curve.
Run on deposits
The extent of SVB’s trouble emerged in a presentation last Wednesday. While the bank emphasised the strength of its balance sheet and the relatively low proportion of its loans compared to its deposits, it also announced a capital increase of $US2.25 billion ($A3.4 billion) and revealed that after an emergency sale of a portfolio of financial securities worth $US21 billion ($A31 billion) it still came out with a loss of $US1.8 billion ($A2.7 billion).
The announcement spooked investors and clients, and sparked a run on deposits.
On Thursday alone, SVB saw an estimated $US42 billion ($A63 billion) of withdrawal orders. It was not able to honour all those requests, and posted a negative cash position of nearly $US1 billion ($A1.5 billion) by the end of the day.
On the stock market, SVB tanked by 60 per cent. Trading was halted on Friday before the Federal Deposit Insurance Corporation (FDIC) took over the bank and said it would protect insured deposits – those up to $US250,000 ($A375,000) per client.
But the FDIC’s guarantee only covered about 4 per cent of the bank’s deposits, with most accounts well over that limit and clients left uncertain as to whether they would be able to recover their money in full.
The biggest US banks are considered stable, in part because of strict requirements enacted after the 2008 financial crisis.
But other mid-sized and regional institutions have been pressured by worries of a similar run on deposits to that suffered by SVB.
Shares in the New York Signature Bank, California PacWest and the Arizona-based Western Alliance all dropped 20 per cent on the day.
Averting panic
With SVB’s future, and billions in deposits up in the air, officials from the Fed, the FDIC and the Treasury raced to craft a solution, hoping to avert a potential financial panic before financial markets opened in Asia.
To stop one bank’s failure from spreading into a systemic banking crisis, the three federal agencies announced on Sunday that SVB depositors would have access to “all of their money” starting Monday, March 13, and that American taxpayers will not have to foot the bill.
The same statement revealed that Signature Bank, the 21st-largest in the country, was automatically closed on Sunday and that its customers would benefit from the same measures as those at Silicon Valley Bank.
More Coverage
In a potentially major development, the Fed announced it would make extra funding available to banks to help them meet the needs of depositors, which would include withdrawals.
On Monday, President Joe Biden praised the “immediate action” by regulators while trying to offer reassurances.
“The bottom line is this – Americans can rest assured that our banking system is safe. Your deposits are safe,” Mr Biden said.
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