Bitcoin Price Gains Momentum as ‘Store of Value’ Amidst Banking Turmoil

Bitcoin’s rally is being fuelled by spot buys, with the majority of flow coming from large market players looking to position in anticipation of a flight to safety

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Source: Shutterstock / Billion Photos, modified by Blockworks

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As central banks continue to struggle with economic uncertainty amid concerns of hyperinflation, investors are turning to digital assets to protect their wealth.

Bellwether bitcoin (BTC) climbed to its highest level in nine months, just above $28,400, on Sunday — representing a 69% increase on a year-to-date basis.

Price action is being driven by spot buys which is positive for the health of the trend, with the market yet to see froth and euphoria in capital allocation, Kurt Grumelart, a trader at Zerocap told Blockworks.

“The majority of this flow is hedge funds and other large market players positioning themselves in anticipation of a flight to safety more so than the actual flight to safety itself.”

Despite this, a comparison to global markets over the last two weeks shows that bitcoin is being actively considered as a risk hedge alongside and, potentially, instead of gold by serious players, Grumelart added.

By comparison, traditional markets have fared much worse, impressing long time crypto market watchers.

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The Dow Jones Industrial Average, which measures the performance of stocks listed on the New York Stock Exchange (NYSE) and the Nasdaq, is down about 3.8% for the year.

US oil, as reflected by the West Texas Intermediate (WTI) crude oil index, has also performed poorly, posting a more than 13% loss over the same period. Meanwhile, gold — often considered a hedge against inflation and market uncertainty — is up around 9% year-to-date.

Bitcoin’s recent outperformance can be attributed to a number of factors, including the narrative of store-of-value, which has returned to prominence despite its past inability to perform that role in practice.

Grumelart pointed to bitcoin’s storied origins in the 2008 financial crisis, as a tool to combat negligence within the existing financial system, and said the current economic climate marked “a perfect storm” for bitcoin to prove its worth.

That climate is the culmination of a series of spectacular bank failures in the US and abroad which threatened to boil over this month, prompting regulators to step in and provide a backstop for depositors.

After the collapse of Silicon Valley Bank and the FDIC shut down of Signature Bank, First Republic Bank was also propped up by a private sector rescue and banks drew on nearly $12 billion of loans from the US Federal Reserve’s new emergency lending program.

And on Sundsy, Swiss banking giant Credit Suisse was saved from collapse by a takeover from rival UBS in a $3.25 billion deal.

Short-term liquidity boost is bitcoin’s gain

In total, nearly $300 billion has been supplied via expansion of the US Federal Reserve’s balance sheet, including of a record $153 billion drawn from the Fed’s discount window. 

All eyes are now locked on the outcome of the next FOMC meeting on Wednesday where the Fed will decide either to scale back its campaign of increased rate hikes, designed to combat inflation, or continue business as usual which has contributed to the breaking of the US retail banking sector.

“A number of central banks are stuck between a rock and a hard place, they simply cannot afford to let the banking sector collapse,” Grumelart said. “While the liquidity spike is positive for all assets, the implications of the action just taken are still unknown.”

The correlation between bitcoin and equities has been largely influenced by the perception the crypto industry, until the recent crisis, served as a risk-on indicator that was closely connected to the economic performance and monetary policies of the US and global markets.

While financial companies have been struggling, the tech sector has been resilient, with the Nasdaq Composite up over 4% and the Technology Select Sector SPDR Fund up about 17% for the year.

Tesla and Nvidia, up 67% and 79% YTD respectively, have their own unique drivers that have propelled their prices in recent months, Grumelart said. High-beta risk assets are primarily affected by market liquidity and risk appetite, leading to periods of correlation. 

Although many risk assets have seen short-term gains, should economic conditions continue to deteriorate, high-growth equities are expected to suffer. But Grumelart is looking for bitcoin to decouple from Big Tech and follow commodities instead.

“If inflation reaches a double peak, it is likely that most high-performing assets, with the exception of commodities and bitcoin, will reverse most of their gains for the year,” he said. “The world should be glad that we have bitcoin as an option to protect our wealth in moments like this.”


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