The way events are playing out now is the exact reason Bitcoin was created on January 3rd 2009, after the 2008 financial crisis: to have an alternative money that worked outside of banks, governments and other intermediaries. As such, this peer-to-peer money has no custodial risk. The market has started to realise the importance of this fundamental characteristic, as was neatly demonstrated in the BTC-USDT and BTC-USDC spread below.

Circle, the issuer of the second-most liquid U.S. dollar-pegged stablecoin, USDC, lost its peg, dropping below 87 cents at one point on Saturday after admitting to having $3.3 billion banked with SVB. But, Tether, the issuer of the most liquid stablecoin, USDT, did not encounter any problems. People started to sell USDC for Bitcoin whilst Tether barely flinched and continued to track the price of BTC-USD. The spread widened to 16% at one point.

State of Play

This potential banking crisis we currently find ourselves in is not the first time Bitcoin has provided a way out. Cyprus’ 2013 banking crisis emptied ATMs and depleted vaults as long lines of worried Russian Ruble and Euro holders queued. Amidst the months of panic, the Bitcoin price increased by 4.2x between February and April. Until this week, other banking crises since have not proved bitcoin’s worth. It has mostly traded as an interest-rate sensitive risk asset, quite often in lock-step with equities, but mind-share has definitely started to change.

A 23% price rise in two days from its lows on Saturday and a volume spike of US$78bn — the highest since the FTX collapse, above average historically and considerably larger compared to weekend volumes — indicates people are starting to get the memo. People are starting to understand that Bitcoin is a hedge against government policy risk, traditional banking custodial risk, and monetary policy risk.

The market is now pricing its first rate cut in July and the terminal interest rate has moved back to May 2023. Interest rate sensitivity in this scenario is a benefit as it should support the price of Bitcoin. Over the medium to long term, fractional reserve banking and financially engineered markets are a valid cause for concern. If things worsen, Bitcoin could decouple from interest rate sensitivity and act as a haven from custodial risk.

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