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Collapse of US banks is fuelling debate about the future of crypto

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4 minute read

While the price of major cryptocurrencies dipped in the immediate aftermath of the sudden collapse of three banks in the US, it has since strongly rebounded, sparking a debate about what this could indicate for the crypto sector.

Bitcoin has soared to its highest level in nine months after initially plummeting in the wake of the recent US bank collapses including Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital.

After trading at around US$22,000 last week, the cryptocurrency fell below US$20,000 immediately following the SVB collapse, before rising above US$26,000 after US regulators guaranteed all deposit accounts at both banks. 

According to experts, the initial price dip was a reaction to the predicament surrounding the collapse of the US banks. Namely, all three were said to have had outsized exposures to the troubled crypto and tech spaces, with Signature Bank and Silvergate Capital generally known as crypto-friendly banks. 

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Speaking to InvestorDaily, Angel Zhong, an associate professor of finance at RMIT University, said crypto investors initially expected a “full spillover” into the tech and crypto sectors.

“Investors reacted dramatically to the collapse of SVB. It sparked panic that it will quickly turn into a global financial crisis,” she said. 

“However, SVB is a regional bank which is not of systemic importance. As such, its collapse is less likely to trigger another global financial crisis. As such, in a way, the large decline in crypto prices [was] an overreaction of investors.”

The subsequent rebound in crypto prices is directly linked to action taken by US regulators, Dr Zhong explained, noting that it came as a “huge relief” to the banks’ customers and had a positive impact on investor sentiment. 

In light of the recent fall in Credit Suisse’s share price, Dr Zhong suggested that investors are beginning to see the danger of centralised assets.

“When centralised institutions are in a crisis, the diversification of decentralised assets such as crypto is more appealing. This is another reason why crypto prices increase,” she said.

However, Dr Zhong reminded that businesses working in the crypto space are not entirely decentralised.

“First, in general, most investors may not fully understand the connection between the crypto space and the centralised institutions such as SVB,” she said.

“Second, as infrastructure such as Web 3.0 further evolves, it is possible that in the future, a fully decentralised system can be built without heavy reliance on centralised institutions.”

Predicted ease in rate expected to benefit crypto

Meanwhile, AMP chief economist Shane Oliver posited that investors are hopeful that recent difficulties could signal a pivot among global central banks.

Some economists have suggested that the Fed and the Reserve Bank (RBA) could slow down or pause their rate hikes in response to the collapse of the US banks and trouble at Credit Suisse.

“Despite the ructions seen in banks and worries about the risk of recession, you’ve seen the NASDAQ and you’ve also seen bitcoin go up,” said Dr Oliver.

“I think it’s a reflection of news that you’ve got some sort of crisis going on, so therefore we’re going to see a return to easy money which will benefit bitcoin.”

However, Dr Oliver said that this does not mean that bitcoin will be seen as safer than other investments, such as deposits in a traditional bank.

“We have seen, where there’s some sort of crisis which leads to slower growth and easy money or lower interest rates, then bitcoin benefits, just like the NASDAQ has benefited,” he said.

“But I think what’s really going on here is not necessarily a sign that bitcoin or crypto has suddenly become a safe haven in any way.”