Bitcoin up, banks down: What’s going on?

You may have noticed that Silicon Valley Bank collapsed last weekend. Silicon Valley Bank was the 17th largest bank in the United States and a bank with a focus on venture capital parties and tech startups. In total, the bank managed more than $ 200 billion in assets. This weekend, the Federal Reserve, FDIC and the US Treasury jointly decided that this bank is too important to fail.

In this case, that does not mean that they keep the bank afloat themselves, but that they guarantee all the assets of Silicon Valley Bank’s customers. As of today, everyone could ‘just’ access their money, so that they could continue to pay wages, suppliers and other matters. With this, the American authorities prevented a domino effect, but something special also happened.

The bitcoin price and that of other riskassets shot up. How can investors celebrate when a giant American bank threatens to collapse?

What is going on?

The year 2022 was still dominated by inflation and the interest rate hikes of the Federal Reserve to fight it. With core inflation (consumer price index minus food and energy prices) still at 5.6 percent, the Federal Reserve has not yet managed to bring inflation towards its target of 2.0 percent.

In that regard, the main central road at first glance still has some work to do. Until the collapse of Silicon Valley Bank, the market also had the idea that the Federal Reserve would be strict with interest rate hikes a number of times. That idea is also completely off the table after it became known that the US government guarantees the assets at Silicon Valley Bank.

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Figure 1: What people currently expect from the March 22 interest rate meeting

The above image shows what the market currently expects from the Federal Reserve’s March 22 interest rate meeting. Where the chance of an interest rate increase of 0.50 percent was still around 80 percent last week, this chance has now decreased to zero.

The market now expects an interest rate increase of 0.25 percent for 65.7 percent and a neutral interest rate decision for 34.3 percent. That would mean that interest rates will not go up and thus that the Federal Reserve will take its first pause during this tightening cycle.

In short, the market no longer believes the Federal Reserve. Federal Reserve Chairman Jerome Powell and his associates have long said that they want to “do everything they can” to get inflation back to 2.0 percent. However, the market sees this as the moment when the Federal Reserve breaks and that means that credibility and confidence in the US central bank are lost for a while.

Federal Reserve Chairman Jerome Powell now has until March 22 to come up with a story and get things right. However, the market believes that the cycle of interest rate hikes is now almost over, which is immediately reflected in the prices of risk assets such as Bitcoin.

Bitcoin is up 15.20 percent

At the time of writing, Bitcoin is ticking in at $24,385 each, up 15.20 percent for the past 24 hours. In practice, the US government’s decision to rescue the drama surrounding Silicon Valley Bank means that the money printers are back on. That is of course strange at a time when you actually have to fight inflation.

The market therefore seems to judge this moment as the capitulation of the Federal Reserve. Personally, I have yet to see it. It is possible that the Federal Reserve will actually bow from this point on and that interest rates may have to be cut as early as March. But there is also a chance that the US government will only guarantee the balances at Silicon Valley Bank and that the problem will be ‘solved’.

It may be that after solving the problems at Silicon Valley Bank, the Federal Reserve will continue to raise interest rates until something breaks in the financial system again. In that respect, we should not rejoice too soon.

In the long run, I expect the US government to intervene more and more often and with more and more money. We now see that the Federal Reserve cannot even raise interest rates towards 5.0 percent before the financial system starts to squeak and creak.

Capitulation of the Federal Reserve

The main reason for the increases in riskassets as Bitcoin thus appears to be in the ‘capitulation’ of the Federal Reserve. The expectation that interest rates may fall in the near term is also clearly reflected in US Treasury yields in the market. They’re all in the red today too.

Figure 2: US Treasury yields

If the 17th largest bank can no longer collapse without the government stepping in, then of course the end is not there. We also know by now that all press conferences and statements by the Federal Reserve are mainly marketing. Pretty much everything they’ve been saying since the rise of inflation hasn’t come true.

First inflation would be a temporary phenomenon, then they would bring inflation back to 2.0 percent for a while, then there was talk of a soft landing for the economy and everything does not seem to work out. Confidence in the US central bank is slowly eroding. The Federal Reserve has bluffed and the whole market now sees that they have bad cards in their hands.

In that respect, March 22 will be a very interesting moment. Then the Federal Reserve has to make its next interest rate decision and chairman Jerome Powell climbs behind his lectern again. If the Federal Reserve actually decides not to raise rates, it could mean the next blow to the US dollar and a positive development for Bitcoin.

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