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Bank Failures "Just Getting Started": What Does That Mean For Crypto?
There's a growing consensus that things are Not Good™ in the US banking sector, and likely further afield in Europe.
A quick recap for the uninitiated:
- Stuffed full of that sweet QE money and stimmy checks, the banks bought stacks of long-dated treasuries, locking up the cash for years to earn the highest returns they could safely get with interest rates being so low.
- Then the Fed raised interest rates, a lot. The banks hadn't expected this because the Fed had told them inflation was "transitory".
- Bond prices move inverse to interest rates, i.e. they fell. Hard.
- A lot of banks found they were underwater as a result. No matter: All they needed to do was wait a few years until those bonds matured, and they'd get back the cash in full.
- Dammit. Pesky depositors started withdrawing their money to get a higher return than the 0.1% banks were still giving them, despite interest rates being more like 5% (which is what money market funds offer).
- The banks had to sell their bonds at a loss to meet their obligations.
- The Fed either drops rates and lets inflation run wild, or keeps them high and kills the banks. For now, it's burning banks.
Below, economist Peter St Onge explains how the problem is only just getting started.
Why Does Crypto Care?
We've never been here before. Bitcoin was launched in the grip of the 2008-09 Global Financial Crisis. All it has ever known is the era of easy money. It has never seen a major recession, and it has—at times, though not always consistently—shown strong correlation with the stock markets, especially the US tech sector. There's a good chance a financial crash would take bitcoin, and the rest of crypto, down with it.
On the other hand, there are two narratives that might play in Bitcoin's favor:
- Bitcoin as an inflation hedge. This is tentatively coming back into fashion after being trashed by the 2022 bear market.
- Bitcoin as self-sovereign value storage. Where do you put your money when banks are collapsing and uninsured deposits are at risk? Perhaps having a little in an asset that you control completely isn't such a bad idea.
No one knows for sure whether crypto will become an effective tool of financial freedom if we see a major financial collapse. Bitcoin is open money and DeFi is open financial services, and they can be used, or not, however people want.
That's what makes writing history so interesting.
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