An absolute whirlwind of activity hit all markets - especially crypto - in the past 7 days. In the past 7 days, we saw 3 major banks go under, utter panic in the world of tech (thanks to SVB) and now, we're seeing markets absolutely rip with BTC up over 30% in the past 72 hours, S&P up 2% and Nasdaq up 3%.
Let's unpack it.
What Happened Last Week?
Last week, there was a bank run on a few major banks in the U.S. This started with Silvergate and then spread as contagion to others. That's typically how these things go.
I was covering all the various news pieces in real-time, so if you want to read what was happening as it unfolded, check out these posts in order:
- If These Things Didn't Destroy Bitcoin, Nothing Will | How We'll Get to $100k
- Silicon Valley Bank | The 16th Largest Bank in the U.S. Goes Under
- No, USDC is Not Going to 0
In a nutshell, we saw one bank collapse after another. The reason was sentiment went absolutely bananas due to one going down. Once one bank had a bank run, everyone at these other "similar banks" decided to withdrawal all of their cash too.
In a fractional reserve system, a bank run is as easy as yelling FIRE! in a crowded movie theatre. Everyone starts heading for the exits and people get hurt. Whether or not the risk of an actual FIRE! was real is besides the point at that moment. It's every man for himself.
This contagion also spread to other things. USDC held about $3B as part of their cash reserves backing USDC->USD redemptions at Silicon Valley Bank. For a day, people thought that USDC wouldn't be able to get that cash and so, the price of USDC crashed to $0.91 as people committed another bank run on USDC itself - selling as fast as they could.
USDC obviously recovered. Even if they lost the $3b, they would've been fine. I wrote about that in the last link of the articles I posted above.
So Why is Bitcoin Going Up?
Well, it's not just BTC. Everything is ripping today. S&P up 2%, Nasdaq up 3%. Bitcoin up 30%.
There are a few reasons for all of this but one lies at the core... Ironically, it is also the core reason why these banks ended up failing:
The Federal Reserve.
The FED hiked rates at an unprecedented pace. Their plan was literally to "break the back of inflation" by actually breaking the economy. They said this.
The FED has a lot more power than people think. They can force a recession, depression and even war. Their monetary policies - with rising or lowering interest rates - reverberate impacts across the entire economy. Not just the U.S. economy... the global economy.
It doesn't even matter if you're in crypto... Nowhere is completely untouched from FED policies. Maybe your only safe bet is if you're 100% off the grid on an island or something. Every single person in the world was impacted and is currently being impacted by these drastic actions taken by the FED.
Oh and by the way, the FED is completely disconnected from reality. Keep in mind that their primary data sources lag behind by several weeks and even months. The way they gather and read data is archaic and the entire system of having one man with control over interest rate policy is something that needs to change.
Potential Interest Rate Hike Coming to a Halt
The FED Funds Rate is 4.75 right now. This is very high, on a relative scale. The thing that broke the market - and broke these banks - was how quickly the FED moved us from negative, 0 and then to this 4.75 rate. It was an unprecedented rate of increase.
Everyone has been watching and waiting for the FED to reverse course and stop raising rates. We all knew it would be coming, but nobody knows when. Many people predicted that toward the end of 2023, we'd see them stop raising rates and even potentially decrease rates.
That being said, nobody predicted that some of the largest banks in the U.S. would go under. SVB was the 16th largest bank in the U.S. and startups banked millions of dollars there. They were FDIC insured and the Government marked them as fully compliant.
Is the government asleep at the wheel? Is the bank incompetent? Did the FED's wildly unpredictable interest rate policy destroy this bank?
IMO, it's a mix of all of these. The bank was not prepared for such wild volatility in interest rates. The bank was not prepared for people to get scared to death at the first sign of potential trouble. The government has horrible oversight in general.
My opinion is that the #1 driver of BTC being up 30% in the past 2 days and stocks rallying like crazy is that we're about to see the FED reverse course.
I think the FED is under immense pressure right now. They hiked rates, they scared the shit out of everyone... Time to at least tap the breaks. I'm not saying full stop and lower rates. I think they'll at least stop hiking rates in the very near sooniverse.
The rumor now is that this is about to take place, so assets - especially risk-on assets like BTC - are pumping in anticipation.
When the news hits that they actually reverse course, I expect even more rallying to happen. If the news doesn't hit and they raise, well you can guess what happens.
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