Cryptoverse: Bitcoin Passes Bank Stress Test

March 21 (Reuters) – Bitcoin suddenly looks like a safe haven as the crisis stymies the traditional world of stocks and bonds.

The notoriously volatile cryptocurrency looks upbeat and hearty as a bank collapse drives markets into the arms of a recession.

Bitcoin is up 21% this month, while the troubled S&P 500 has lost 1.4% and gold is up 8%.

“If you’re going to describe an environment where banks are running in succession as central banks try to fight inflation with rapid rate increases, that’s about as close to a thesis for holding bitcoin as you’ll ever hear.” Stephane Ouellet, CEO of digital asset investment platform FRNT Financial ( FRNT.V ), said.

The cryptocurrency, for now, has severed its ties to stocks and bonds and rallied to gold, fulfilling at least part of creator Satoshi Nakamoto’s dream — that Bitcoin would be a haven for distressed investors.

Bitcoin’s 30-day correlation with the S&P 500 (.SPX) has fallen to negative 0.12 over the past week, with a magnitude of 1 indicating that the two assets are moving in locked step.

The sell-off in banks wiped out hundreds of billions of dollars in market value and forced US regulators to launch emergency measures. Silicon Valley Bank and crypto lender Silvergate have been on a downward spiral over the past two weeks, while Credit Suisse has been teetering on the edge.

‘Back to main protocol’

Don’t get carried away though. This is Bitcoin.

“The bullish argument is that this dynamic is temporary, and ultimately this rally is not going to continue,” Ouellette said.

It remains to be seen whether bitcoin’s bullishness will last as the focus is on the Federal Reserve’s policy meeting this week as the US Federal Reserve battles inflation and banking pressures.

Also, the appeal of cryptocurrency is not all about security.

The rapid price rise has forced some short sellers to reduce their bets and buy back coins. Data from Coinglass shows traders liquidated $300 million worth of crypto positions on Monday, with most of that — $178.5 million — being short positions.

Nevertheless, Bitcoin is making a comeback.

According to CoinMarketCap data, it now accounts for nearly 43% of the total crypto market, its highest share since last June, with the total cryptocurrency market capitalization rising 23% to $1.1 billion since March 10.

“We see a return to the core principles of Bitcoin, a financial asset independent of opacity and intervention from a centralized financial system,” said Henry Elder, head of decentralized finance (DeFi) at digital asset investment manager Wave Digital Assets.

The major banking crisis has also fueled some interest in DeFi, with the total value of tokens linked to such platforms rising from $43 billion to $49 billion in the past week, according to DappRadar.

Bitcoin in the banking crisis

Not all parts of the digital world are immune to the banking collapse. No. 2 The stablecoin Circle USD or USDC lost a 1:1 peg to the dollar, with its reserves parked in a shuttered Silicon Valley bank.

Its market capitalization fell to $36.8 billion last Friday, from $43.8 billion a week earlier, as concerns spread about the USDC’s ability to maintain the peg, while leading stablecoin Tether gained about $4 billion.

Market participants said some USDC withdrawals could also be reinvested in bitcoin, helping fuel the rally.

“It’s too soon to say that bitcoin has proven its narrative of an alternative in a banking crisis,” warned Ed Hindy, chief investment officer at Tire Capital in Geneva.

But he added: “The rally we’re currently seeing in bitcoin will be traced back to a time when its core asset has been stress-tested as a decentralized non-sovereign asset.”

Reporting by Medha Singh and Lisa Mattakkal in Bangalore; Editing by Vidya Ranganathan and Pravin Sir

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