Bitcoin was born at the tail end of the Great Financial Crisis (GFC) over 14 years ago. The original block, which issued the first 50 bitcoins, included an inscription from its creator Satoshi Nakamoto:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This message, permanently embedded in the world’s first blockchain, was the headline from British newspaper The Times the morning of January 3, 2009. Nearly a decade and a half later, crypto is slowly transforming our economy and the value of this emerging asset class has become the topic du jour among pundits, policymakers, and those that believe in the transformative benefits of open blockchain technologies.
But as banks collapse and regulators flounder about to protect depositors and the banking systems they oversee, it is clearer today that the alternative absent at the start of the GFC, Bitcoin, is becoming increasingly appealing and valuable. Never before has an investable asset with a fixed supply that is available to anyone in the world—and is not subject to the policy whims of governments—seemed so important.
Beware the Ides of March?
The US and Europe are in the midst of a full-fledged banking crisis. There are 10% of US banks that have larger unrecognized losses than SVB and another 10% with lower capitalization levels than SVB. Confidence in the banking system is lower than during the GFC, with currently only one in 10 US adults having high confidence in the US financial system. With this backdrop, it’s not a surprise that Bitcoin, created when faith in financial institutions was at an historic low, has attracted more interest from investors as we have learned more about this current crisis. This interest became very apparent last week as governments scrambled to backstop banks and preserve the banking system.
The phrase “Beware the Ides of March!” is often used to warn about a possible betrayal or forthcoming misfortune. It became popularized from William Shakespeare’s play Julius Caesar and is in reference to his impending assassination. But on the Roman calendar the Ides of March (March 15 in modern times) was known for something else—a deadline for settling debts.
While last week was more about creating new debts than settling old ones, I think the Ides of March 2023 will be remembered as the beginning of a re-awakening of an awareness of the inherent dangers of a debt-laden global banking system where depositor guarantees are limited and savers are subject to the financial health and profitability of their financial institution. This misalignment of incentives is precisely the problem Bitcoin was created to solve. And we are seeing a recognition of this reflected in year-to-date prices, as Bitcoin has risen 73% and has outperformed 97% of the companies in the S&P 500. Much of this outperformance came in the immediate wake of SVB’s March 10 closure, as bank indices fell and other asset classes—including gold—were flat or generated very modest returns. A clear demarcation line between a pre- and post-SVB world has been drawn, and we believe Bitcoin will benefit in this new regime.
A flight to quality
To further understand why this year has been so strong for crypto assets, it’s helpful to look at what the first quarter of 2023 has thrown at us so far:
In January, the potential alleviation of inflation expectations and the possibility that the Fed could avoid keeping rates higher for longer pushed BTC over 38%, far surpassing other risk asset classes.
February was mostly eventless, as prices across asset classes were flat. Bitcoin and the Nasdaq Crypto Index™ were up a modest 1%, negatively impacted by regulatory actions against crypto firms but resilient nonetheless.
Then came March. This month began with fears of the Fed hiking again (or accelerating the pace of hiking) before a complete reversal of this perspective transpired as Silvergate, SVB, and Signature fell and the fragility of European banks and US regional banks was exposed. This changed the Fed’s message and resulted in the FOMC pulling back on the expected 50 basis point (bps) rate hike, opting for a 25 bps hike instead.
While Bitcoin’s price has risen this year because of the expectation of softer monetary conditions, it is curious to note that BTC is outperforming ETH and other crypto assets while performing more in line with gold. I believe this is a flight-to-quality movement that is mostly correlated with Bitcoin’s strongest attributes, including its store of value characteristics, immutability, and fixed supply.
A strengthening long-term investment thesis
The increasing interest in Bitcoin is, of course, much more than just a short-term reaction to bank failures and financial system instability.
Last month I wrote about the current Bitcoin recovery cycle tracking previous recoveries—it’s hard to argue that history doesn’t often rhyme. We are at the beginning of a price recovery similar to what we saw in early 2019, and if we use history as our guide we can continue to expect high volatility and price uncertainty. But these things are always part of a recovery period. And recent macro events may help push us to the next bull market, which may be accelerated by the next Bitcoin halving, likely in May 2024. All of these factors together are solidifying Bitcoin’s vital role as a borderless, decentralized, and censorship-resistant network. This will continue to push crypto adoption and growth.
In the more near term, last week’s events have only strengthened the perspective that Bitcoin’s recovery is taking shape. BTC’s strong performance this year is both a reflection of its resilient fundamentals and its role as an alternative to an increasingly fragile banking system. Going forward, Bitcoin is likely to benefit in either a hawkish or dovish monetary policy environment as rising rates put more pressure on banks while a lower rate environment will benefit risk assets in general.
Regardless, in an environment of economic uncertainty where the instability of the world’s largest financial institutions is being brought to light, a digital currency with a fixed supply has never been more relevant. And Bitcoin’s significance will continue to grow as more people realize its important role in the financial system and global economy. In other words, the investment thesis for the world’s first cryptocurrency is playing out right before our eyes.
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