Multiple bank failures last year highlighted Bitcoin's role as an alternative asset that exists outside the traditional banking sector.
However, continued uncertainty surrounding banks could have a positive or negative impact on crypto market sentiment, depending on who you ask and what happens next.
The Fed created the Bank Term Funding Program (BTFP) in March 2023, a month in which Silvergate Bank announced its intention to liquidate, Silicon Valley Bank failed, and the FDIC announced Signature Bank. Closed.
The Fed program provided funds to eligible depository institutions to help banks meet the needs of their depositors. However, it plans to stop accepting new loans on March 11th.
Additionally, multiple investors injected more than $1 billion in capital into New York Community Bancorp (NYCB) on Thursday. The company, which has approximately $100 billion in assets, posted a loss of $2.7 billion in the fourth quarter. The company's stock price fell to less than $2 on Wednesday, down from more than $10 at the end of January.
Ruslan Rienka, head of markets at crypto platform Uhodor, said risks to the banking sector will remain until the Federal Reserve cuts interest rates.
“Investors should monitor the banking sector closely until at least the middle of this year,” he told Blockworks. “In a worst-case scenario, a widespread banking crisis could trigger a severe correction in TradFi and crypto markets.”
Still, most medium-sized banks are “far removed from the crypto market,” Lienka said, noting that their main business is lending to the “real sector” of the economy.
He added: “As for NYCB, there are problems, but it's too early to talk about bankruptcy.” “Therefore, we do not expect the crypto market to react in the near future until we receive more new inputs.”
Is instability in the banking sector bullish for Bitcoin?
NYCB's move was announced just days before the Fed's BTFP halted new lending to participants in the target segment.
Jeff Embry, managing partner at crypto hedge fund Globe 3 Capital, said the Federal Reserve's effective elimination of support for small banks is likely to accelerate consolidation in the banking sector. .
“It is inevitable that the banking sector will become increasingly concentrated around large banks that are 'too big to fail,'” Embry told Blockworks. “We believe that as the banking sector becomes more centralized, there will be further demand for decentralized crypto assets.”
A Globe 3 Capital executive noted that cryptocurrencies could become a “flight to safety” asset in times of uncertainty. The price of Bitcoin rose about 50% in the weeks following the March 2023 bank failure.
read more: Bitcoin price gains momentum as 'store of value' amid banking industry turmoil
Sameer Karbage, chief investment officer at crypto asset management firm Hashdex, said the end of BTFP could have a more subtle impact on the crypto market.
In a March 2023 blog post, Hashdex executives wrote that the bank's vulnerabilities are a “renewing reminder” of the dangers of a “debt-laden” banking system where customers are exposed to the health of their financial institutions. He said it had become.
“This incentive mismatch is exactly the problem Bitcoin was created to solve,” Carbage wrote at the time.
However, if the suspension of BTFP adds to the instability in the banking sector, it could trigger a “massive risk-off movement” that could potentially be negative for cryptocurrencies, he told Blockworks this week. Ta.
“Despite this situation, and similar to the situation last year, Bitcoin remains positive as investors look towards non-sovereign stores of value such as Bitcoin and gold from the banking system. There may be a reaction,” Carbage added. “Unlike last year, it is now much easier for US investors to access Bitcoin through recently launched ETFs.”
NYCB’s funding and suspension of new BTFP lending comes amid a rally in crypto prices that led to Bitcoin hitting a new all-time high on Tuesday.
The price increase comes as investors have shown sustained demand for the U.S. Spot Bitcoin ETF, which was approved by the Securities and Exchange Commission in January.
The next Bitcoin halving, an event that occurs every four years during which Bitcoin miners' per-block rewards are cut in half on a block-by-block basis, is scheduled for next month. Such events have historically caused an upward trend in BTC price.
read more: The next Bitcoin halving is approaching.Here's what you need to know
“With the newly created Spot Bitcoin ETF and the upcoming Bitcoin halving in April, we are seeing an absolute wall of liquidity flowing into Bitcoin,” Embry said. “Add in the uncertainty in the banking industry and it could be a perfect storm for Bitcoin and crypto-related assets.”
Embry noted that his firm's prediction of a Bitcoin price of $124,000 by the end of 2024 may be too conservative at this point.
BTC price was hovering around $67,250 early Friday, up nearly 9% from a week ago.
However, Rienka warned that the impact of the economic crisis could far outweigh positive events within the crypto market, such as the approval of ETFs and the upcoming Bitcoin halving.
He further added, “In my view, the crypto market can only grow in the context of calm or growth of TradFi.”
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