Why Bitcoin Is Surging Even Though The Banks Are Collapsing

Bitcoin has been on a tear recently, with the price breaking beyond US$27,000 for the first time in months. Many investors are wondering why Bitcoin is in such great demand when institutions like Silicon Valley Bank, Silvergate Bank, and Signature Bank are going bankrupt and collapsing. To understand what is causing this jump in value, we must step back and examine some important factors that have contributed to its sudden rise recently.

. . .

1. The Purpose of Bitcoin Becomes More Apparent

Remember why Bitcoin is created? I bet most people still do not fully understand the reason Satoshi Nakamoto created Bitcoin back in 2008. The Financial Crisis occurred that year and banks such as Lehman Brothers have gone bankrupt due to bad debt and many people lost their savings due to the crash. This gives rise to the idea to create a peer-to-peer payment network so that the banks can be removed as intermediaries from financial transactions. Banks and other financial institutions will not be involved in every transaction and this allows people to perform the transactions by themselves.

So what makes it more secure than banks? Isn't the banks the most reliable ones like what the government claims and what we were taught in school that we will save money and make transactions through this centralized institution?

Satoshi has found a better way for us to put our trust in, which is relying on the technology itself to be impartial, and "Proof-of-Work" is his answer. The technology employs mathematical algorithms to confirm transactions without the need for a central authority (in this case, banks).

The recent banking failures of the S Banks (Silvergate, Silicon Valley Bank, Signature Bank…a conspiracy theory coming up maybe?) made the public realize that in the situation where centralized institutions collapsed, they are not able to access all their funds and only able to reclaim back the highest amount assured. On the other hand, buying Bitcoin and storing it in cold wallets do provide a safe haven to store your crypto assets.

Hence, from this chart adopted from Chainalysis, we can see that a large spike in the amount of Bitcoins seen on exchanges after investors started to buy more of the asset due to the lack of confidence in the traditional financial institutions.

2. A Bet That The Fed Will Halt Interest Rates Hikes

Another factor that plays a pretty large role in this surge is the Fed's interest rates. Generally, when the interest rates rise, investors will move away from risky assets such as cryptocurrency and move to less risky assets such as bonds. However, when the rates are getting lower, investors will make bolder moves to invest in riskier assets that have higher return.

As mentioned previously, banks are collapsing like domino, but why does it happen now instead of back then during the 2020–2021 pandemic period? Same issue, due to high interest rates. Since last year March 2022, the Fed has noticed that inflation rate is getting higher and they are trying their best to mitigate it, so they increase interest rates in order to cool down the economy. As the rates getting higher, the banks will need to bear more borrowing costs, which adds up more financial stress for them. Some banks have also made bad financial decisions during this period.

Therefore, in order to stop this contagion from spreading throughout the global banking industry, government has stepped in to take over and restructure some of the banks and experts are predicting that the Fed will most likely be halting the interest rate hike to balance out the situation.

The crypto market responded with a more positive manner and the price of Bitcoin has been on a meteoric rise from US$20,000 back on 10 March to US$28,000 on 20 March 2023 (at the time of writing).

3. Positions of Short Sellers Got Liquidated

Other than more and more investors injecting money into Bitcoin which pushes the price higher, we have the short sellers getting liquidated from their positions. You see, in trading, people can make money when the market is going upwards or when the market falls. For those investors and traders who make profits when the market crashes, they are 'shorting' the market. This means that the short trader will use a margin facility to borrow some crypto from another trader (the short trader doesn't own any of the crypto), then buy it back at a lower price to gain profits.

Bitcoin fell briefly below $20K when Silicon Valley Bank announced that they will go bankrupt. USDC also de-pegged from its US$ 1 mark and fell to as low as US$ 0.90. Short sellers rush to place their short positions around the US$ 20K price level, hoping that the price of Bitcoin will fall even further. However, the US authorities stepped in and took over the bank. In order to calm the market, they released a statement saying that all users' deposits will be fully covered. This boosted the confidence of fellow investors and they jumped right back in, pushing the price higher, which caused the short sellers to buy back their positions in order to cover their losses.

And as expected, the price of Bitcoin went even higher.

Will this Bitcoin bull run sustain and reach another all-time-high? Nobody knows. However, we can say that Bitcoin currently is doing what it designs to do and prove to the world that decentralization can be a better way for people to take care of their financial assets, which is a big win for cryptocurrency as a whole!

. . .

Do you know which companies own the most Bitcoins in the world? Read this article to find out!

Want to learn more about crypto related news and info? Check out our Youtube, Instagram, and Twitter pages!

Reference

• https://www.forbes.com/advisor/investing/cryptocurrency/why-is-bitcoin-going-up/
• https://cointelegraph.com/news/why-is-bitcoin-price-up-today
• https://financialgym.com/blog/2021/1/2/bitcoin-101-what-is-bitcoin-and-why-was-it-created
• https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-collapse-central-banks-interest-rate-rises
• https://markets.chainalysis.com/
• https://www.investopedia.com/news/how-short-ethereum/
• https://www.outlookindia.com/business/bitcoin-soars-again-after-us-banks-fail-reaches-highest-mark-in-8-months-news-271935
• https://money.com/crypto-surging-after-svb-collapse/
• https://www.grid.news/story/technology/2023/03/16/the-crypto-market-is-on-the-rise-as-crypto-banks-like-signature-collapse-why/
• https://thechainsaw.com/defi/bitcoin/bitcoin-price-news-sixty-nine-percent-increase/
• https://www.coindesk.com/markets/2023/03/13/bitcoin-ether-retrace-weekend-losses-as-bears-see-183m-in-short-liquidations/