Loss of major fiat ramps a blow for crypto
Stefan Rust, CEO of Truflation and former CEO of Bitcoin.com, says:
“The US government has done enough to stave off a banking collapse for now, but much remains to be seen. In the 24-hour world of crypto, we see sustained green across the board with Bitcoin and Ether up more than 8% over the past 24 hours as European markets tumble in early trading and US markets are poised for the open.
This doesn’t mean crypto is out of the woods, however. Indeed, now that SIlvergate and Signature banks are gone, the main Fiat on and off ramps for the crypto industry are also gone. Crypto will now be forced to move across into JP Morgan, Barclays, Nomura, and other “systemically important” banks. However, with regulators like the US SEC making life ever harder for cryptocurrency firms, this may not be simple or even possible for many.
We also have US inflation numbers coming in tomorrow, with the Fed having indicated that January’s sticky CPI reading means it is more likely to hike rates by 50bps next week rather than 25bps. Should February come in the same way – or God forbid higher – investors will be spooked.
Of course, none of this should matter for crypto – an asset class founded as a direct response to the last banking crisis. One possible good news story to come out of this would be a decoupling from the main markets like we saw in 2020. With the main fiat on and off ramps shut down, this could be the moment that we see some separation.
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Certainly, this is a trend that we hope to see over the long term. There are no bailouts and no bail-ins in crypto. Inflation is defined by smart contracts; one BTC is one BTC and 1 ETH is 1 ETH and the value of their utility and purchasing power remains equal for the services you need on those specific networks. This is the global decentralized model of finance – ready and waiting to go.
For the wider banking system, this could still be the beginning of a meltdown, given the amount of exposure that all the US banks have to US Treasuries – or T Bonds – which have plummeted in value as the Federal Reserve has increased interest rates over the past year to tackle inflation.
Currently, US banks have around $700 billion in unrealized losses due to this exposure, with the market price for these bonds standing at around $.70-$.80 on the dollar. In the case of a bank run, these T Bonds need to be liquidated, crystallizing the bank’s loss and further diluting the bonds’ nominal value. This is what led to the demise of Silvergate and SVB.
The Fed’s new offer to give 1-year loans to struggling banks in exchange for T Bonds and mortgage-backed securities at the price originally paid for them will help to increase confidence. Whether this is enough to stop the dominoes from falling, though, is not clear.
Indeed, we are already seeing widespread selling of banking shares as investors – who are not protected by the guarantees dished out by the US Treasury and Federal Reserve over the weekend – head for the hills.”
