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$1 million at the end? Bitcoin's beta and digital gold wars

23-03-23 22:00

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The Final $1 million? Bitcoin's Beta Finger and Digital Gold Fight

Original article by Bankless

aididiaojp.eth, Foresight News

Even as the macro environment becomes more worrisome, bitcoin continues to climb.

The latest debacle began with the failure of Silicon Valley banks and has since spread to other institutions around the world. In response to this banking crisis, central banks and governments did what they have always done: they printed money to keep the system afloat.

The Fed's balance sheet has grown by nearly $300 billion since the crisis began, offsetting nearly half of the $600 billion in quantitative tightening they have implemented since March 2022.

It used to be that almost no one could escape this dollar system, maybe you could buy some gold and try to bury it in your backyard. Thankfully, cryptocurrencies have made it easier for us to deal with this crisis. Crypto assets are soaring, led by bitcoin, since the banking crisis began in 2023.

Bitcoin's massive rally over the past few weeks has been great for cryptocurrency holders, but the implications are far more important than double-digit percentage gains.

The rally has the potential to change the way people think about cryptocurrencies forever. Why is this so? Let's find out by exploring the market's reaction since SVB's collapse, so we can assess how it affects Bitcoin now and in the future.

Bond market

The bond market has experienced huge volatility in the past few weeks, with prices soaring and yields plummeting since the crisis began.

The yield on two-year Treasury notes fell sharply from 5.1% on March 9th to 4.1% on March 21st. The two-year note is a "Fed bellwether" because it is the best predictor of how the central bank will act in the short term to change the federal funds rate. The 10-year note has also plummeted since the SVB collapse, falling from 4.0% to 3.6% since Nov. 9.

Us 2-year and 10-year Treasury yields 3/9-3/21 - Source: TradingView

The decline in yields could be due to a number of factors. One is that because of "flight to safety", investors buy Treasuries because they are less risky and the US government is unlikely, at least nominally, to default. The move may also have been prompted by investors rushing to get ahead of a possible pause or pivot by the Fed. Although, as we found out today, it's not quite over yet.

stock

The stock market has experienced wild swings since the crisis began.

The S&P 500 and Nasdaq fell 4.3 per cent and 4.7 per cent, respectively, between March 8 and 13, as concerns mounted over the health of regional banks and potential contagion. But after the government intervention in SVBS and Signature, indexes have recovered from their losses, with the S&P up 4.9 percent and the Nasdaq up 7.8 percent since the morning of March 13.

S&p & Nasdaq 3/9-3/21 - Source: TradingView

While individual sectors, such as regional banks, continue to suffer, the decline could be halted by government measures to prevent further panic and the aforementioned Fed rate cut expectations. The Nasdaq's outperformance relative to the S&P is likely due to a flight to the safety of big tech stocks, with shares of companies like Apple, Microsoft, Google and Meta all surging since bottoming out on March 13.

Precious metal

Precious metals have soared since the banking crisis. Gold is up 11.5% since March 9, while silver is up 7.0% in that time.

Gold & Silver 3/9-3/21 - Source: TradingView

Like Treasurys (and to some extent large-cap tech stocks), gold's rise may be due to a flight to safety. Unlike bonds and stocks, gold and precious metals act as a hedge against the collapse of the fiat currency system because they are non-sovereign, not dependent on or issued by any one country or monetary system.

cryptocurrency

The cryptocurrency market has moved higher since the banking crisis. BTC has surged 29.4 percent and ETH 16.4 percent since March 9, with the crypto market adding $263 billion in value during that time.

BTC and ETH March 9-21 - Source: TradingView

Although BTC and ETH fell 10.1% and 10.6% respectively during the "Stablecoin panic" between March 9 and 10, this was due to market panic over the decoupling of USDC due to the inability to withdraw Circle's $3.3 billion deposit in SVBS.

Since the collapse of SVBS, the dominance of mainstream cryptocurrencies, especially bitcoin, has increased from 43.6% to 47.3%. It has risen for the same reasons as gold, and cryptocurrencies are acting as a safe haven.

BTC Advantage - Source: TradingView

And like the other asset classes above, cryptocurrencies could reverse course before the Fed pauses or reverses course in anticipation of the Fed tightening cycle coming to an end. Crypto assets such as bitcoin, which seem to be sniffing out the big additions to the Fed's balance sheet and the hidden depreciation of the dollar that has taken place in the wake of SVBS, are more liquidity-sensitive.

Why has the game changed

The game has changed for bitcoin, with BTCS acting as a safe haven during the biggest banking panic in decades, even though skeptics consider them risky assets. In fact, it has outperformed every major asset class since the crisis.

While the banking sector was in crisis, bitcoin soared and became the best protection against the collapse of the legal system. In theory, it makes sense why Bitcoin has performed so strongly, because it has all the attributes of a haven and a store of value. As noted above, bitcoin is a non-sovereign asset that is scarcer, more portable, and harder to access than gold.

However, we have yet to really see this work in practice. Conversely, cryptocurrencies are often labeled "high-beta Nasdaq," a label that makes sense to some extent due to the strong historical positive correlation between the two.

Correlation between BTC and Nasdaq -- Source: The Block

In simple terms, the comparison never made much sense. Although both Bitcoin and the Nasdaq are related to technology, bitcoin is a monetary asset, it is not a company and does not generate cash flow. However, their correlation has not weakened significantly before SVBS.

Correlation between BTC and Gold and Nasdaq - The Block

As we have seen, the correlation between BTC and Nasdaq has changed since the crisis began, while that between BTC and gold has strengthened. This may be a small sample, of course, but given the magnitude of the events of the past few weeks, the price action is hard to ignore. This seems to indicate that Bitcoin is transitioning from a technology game to true digital gold.

This is a major shift in how Bitcoin is viewed and traded. Whether crypto natives, traditional financial institutions, retail investors or nation states, investors will now increasingly view Bitcoin as a safe haven rather than a purely speculative vehicle.

Not only does Bitcoin protect against institutional failure, it also acts as a hedge for its holders against currency depreciation due to large increases in the money supply, such as we have seen since the creation of BTFP, a term funding scheme for banks. Investors were rewarded for holding BTCS during the crisis, raising the likelihood that they will behave similarly in the next one.

Will the BTC reach $1 million?

As usual, bitcoin's rally has energized the community, and some big names in the industry have made bold price calls. The most popular of these opinions come from industry heavyweights such as Balaji Srinivasan and Arthur Hayes. They think the BTC will reach $1 million because of the Fed's unlimited money printing and the depreciation of the dollar.

Where the forecasts differ is in the time frame. While Hayes predicts we'll see seven-figure BTC in the next few years, Balaji thinks it could hit $1 million within the next 90 days.

Balaji's call is enough to make anyone, cryptocurrency or fiat currency holders, anxious because hyperinflation of the dollar in 90 days would cause serious turmoil in the entire world.

Whether or not the timetable will prove correct, the monetary system is crumbling, a dead tree that has never recovered from the global financial crisis and continues to be propped up by printing money.

With each emergency, bailout and dollar printing, the fragility of the monetary system becomes more apparent, as if all roads lead to endless money printing. Instead of curing the causes, however, central banks simply continue to prolong their inevitable demise by perpetuating crises into the future.

One area where I agree with Balaji is that hyperinflation happens very quickly, whenever it comes. Balaji believes the collapse of the dollar relative to bitcoin will happen incredibly quickly because of the digitization of the world and the speed at which we transmit information and value. This makes sense, as we have seen over the years with cryptocurrencies and now with traditional finance, in the Internet age people can lose faith in money and financial institutions at a breakneck pace.

In the meantime, talk of hyperinflation is likely to be exaggerated. But, after the events of the past few weeks, I am more confident than ever that cryptocurrencies will grow into a more important safe haven asset on behalf of investors.