Financial markets have been hit by fear and turmoil in recent days, with concerns around the potential spread of a banking contagion taking hold. It all started with the closure of Silvergate Bank’s SEN payment network, a key backend crypto industry infrastructure, following a run on deposits back in November. This was quickly followed by the implosion of Silicon Valley Bank, the 16th largest bank in America, and a bastion of start-up capital and VC funding. US bank stocks were battered on Friday, with some stocks down as much as -35%. This damage continues to spread today, with several US bank stocks seeing trading halted.
Despite the banking chaos, crypto prices have been soaring. Bitcoin (BTC) surprised markets by bouncing back above $20,000, with this being described as a ‘cyprus moment‘ as investors race to find safer havens for capital outside of the fractional reserve banking system. There are three reasons why crypto prices are soaring despite the banking chaos this week.
First, the Federal Deposit Insurance Corporation (FDIC) began selling SVB assets to repay up to 50% of deposits to SVB clients. This comes as a substantial relief to the legions of USDC holders who held with despair as USDC depegged over the past few days. The effort to repeg has seen significant support from oinbase">Coinbase, which moved to re-establish 1:1 USDC:USD trading. On Sunday, Circle CEO Jeremy Allaire revealed the $3.3bn (8% of Circle’s holdings) held by the firm with SVB will be available today. Overall, it seems that Circle has escaped the worst of Silicon Valley Bank for now, and this has been a huge boost of reassurance to volatile crypto markets.
Second, despite serial efforts to break upwards to re-test $25,000, Bitcoin (BTC) price action has been suppressed by heavy sell pressure for almost a month, but the worst could be over for now. Looking On-Chain, Bitcoin has faced 25-days of net inflow onto exchanges. This means more BTC has moved onto exchanges than off of them, which is typically a sell-off signal as investors move their BTC off their ledgers and onto exchanges to be sold. However, as of yesterday, it appears that the sell-off could now be over, as the overall exchange net position change has finally reversed to net outflow, a clear accumulation signal.
Third, the SHA-256 hash rate, which measures the quantity of computing power directed at the Bitcoin network, is currently the highest it has ever been. There has never been so much computer power directed towards Bitcoin, meaning network adoption is the highest it has ever been. This feeds into the second benefit of making the network more secure: a much-feared 51% attack against the BTC network is less likely than ever before. With the next Bitcoin halving event rapidly approaching next year, a high difficulty rate is bullish for miners.
Despite the recent banking crisis, crypto investors appear to be optimistic. They have taken comfort in the fact that Circle has escaped the worst of Silicon Valley Bank, and On-Chain sentiment suggests an end to the sell-off period as markets shift towards accumulation positioning. Additionally, the SHA-256 hash rate is the highest it has ever been, which means that the Bitcoin network is more secure than ever
