The first signs of a banking crisis in the U.S. or the beginning of a crypto rally?

We discuss the serial bank failures in the U.S. and explain the reasons for the growth of the crypto market against the background of these negative events. We highlight three main factors that keep Bitcoin's price above $24k.

The logic of what's going on 😨

The most important current event was the simultaneous bankruptcy of three US banks: Silvergate, Silicon Valley Bank, and Signature Bank.

Three other US banks are reportedly in line for bankruptcy:

• First Republic Bank.

• Pacific Westerns.

• Western Alliance.

Clearly, these are not random coincidences, but some important systemic event is taking place. On the morning of March 13, the Fed convened in a special and closed session to provide emergency assistance to these banks. It was decided to provide liquidity to the affected banks. Today, President Biden also assured Americans that they can trust the U.S. banking system.

What was the trigger for these loud bankruptcies? Last week, the Fed chief announced he was determined to keep raising interest rates further, even more aggressively than the market had hoped. Each additional rate hike makes raising capital more and more problematic for banks, putting them under stress. For some banks, we have obviously reached the limit of their safety margin, as happened with the three named banks.

Our expert Arthur Hayes has previously detailed that attempts to raise the rate will lead to a collapse of the banking system, and it is only a matter of time. He also predicted that soon after the problems with the banks begin, the price of Bitcoin will begin its new historical rally as the Fed will be forced to capitulate in tightening monetary policy. Obviously, so far everything is going exactly according to this scenario, as Arthur predicted (this is not financial advice to follow).

How did it affect the crypto market?

Let's focus in detail on how it affected the crypto market, as the correlation is very close. Unexpectedly for many (except for those who have read Arthur Hayes' predictions here), the collapse of the banks was a strong driver for Bitcoin's rise.

But what exactly is causing the rise in price for Bitcoin? Let's highlight three main factors next.

The reason 1: Running away from stablecoins

The collapse of Silicon Valley Bank, which held some of the coverage assets for the USDC, came as a shock to holders of this second-largest stablecoin by market capitalization. It is impossible to convert such amounts into fiat, so most chose to flee to Bitcoin as the most reliable and most liquid of crypto-assets.

This panic also touched BUSD, another stablecoin, which experienced similar problems due to the regulatory attack a week ago. Yesterday, Binance CEO Changpeng Zhao announced on Twitter that the exchange would convert the approximately $1 billion remaining from its Industry Recovery Initiative funds (mostly in BUSD) into native crypto assets — specifically Bitcoin, Ether, and BNB.

This massive exit from stablecoins created a strong pump, primarily on Bitcoin, pushing its price up.

User @ByzGeneral describes the situation this way:

“Holy shit someone on Coinbase is buying spot like their life depends on it.”

The reason 2: The liquidation flow

Seeing the initial market decline on very bad news, many traders logically assumed further market declines, fueled by strong FUD from bank failures. So around $20,000, they decided to start shorting Bitcoin, expecting further declines.

But the upward momentum was stronger than most traders expected (influenced by the mass flee of stablecoins, as described earlier). As a result, a classic avalanche of liquidation of previous downside bets followed.

This "liquidation cascade" effect is well known: the forced closing of traders' positions causes the exchange to redeem the asset (which the trader unsuccessfully decided to short) on the open market. Mass liquidations thus pushed the price of the asset even higher, in turn causing a new wave of liquidations that eventually led to the price of Bitcoin exceeding $24,200, according to Binance.

Trader @easyeight08 describes the situation this way:

“THERE IS [sic] 28 FUKIN [sic] BILLIONS IN SHORT POSITION #BTC

BRUH, IF THIS IS NOT ENOUGH FUEL TO PUMP IT ABOVE 25K, THEN I QUIT!”

The reason 3: The money printing is enabled again

In response to serial bank failures, the Fed and the U.S. Treasury Department launched an emergency program to provide funds to financial institutions to make sure they "have the ability to meet the needs of all their depositors."

If factors 1 and 2 are temporary in nature, the third factor is a long-term factor that will have a stimulating effect, including on the crypto market. All of these factors combined will provide serious support for Bitcoin in the coming days, providing support for whole cryptocurrencies.

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