Will Bitcoin Become a New Safe Haven?

In previous years Bitcoin rallies were largely in line with a broad risk-on sentiment, but in the last two weeks, Bitcoin soared thanks to bank safety worries and despite mixed performance of broad markets. That could suggest Bitcoin became a new defensive asset.

Banking Crisis

A banking crisis unfolded during the last two weeks. Insolvencies of Silicon Valley Bank (SVB) and Signature Bank in the US stoked worries regarding bank safety. The US authorities guaranteed all deposits at SVB and Signature Bank, but that was done on an ad hoc basis with no general solution so far. Last weekend there was the forced merger of 167-year-old systemically important global bank Credit Suisse in order to prevent its failure, which would have potentially catastrophic consequences for the global financial system.

The index of the US regional banks lost about a third of its value, and broader financial company indexes were hit too. Even Asia-focused major bank HSBC fell by 10% since March 9.

Banking Stocks (USD)

The banking crisis stimulates people to seek safety, and some of them may see crypto as a refuge. Tech guys who kept money in SVB had a few very tense days between SVB failure, and the deposit guarantee announcement and may become disappointed in traditional finance and seek better alternatives. A primary client base of SVB consisted of venture companies whose management is familiar with crypto but likely has relatively low expertise in finance. I think at least some of them decided to diversify into crypto. Given the sheer size of their deposits (most of SVB deposits were way above the $250,000 limit guaranteed by the Federal Deposit Insurance Corporation), that may have been a key reason for the recent Bitcoin rally.

Also, SVB insolvency hit USDC as Circle kept $3.3 at the failed bank. USDC dropped to less than 0.9 vs. USDT immediately after the news confirming a possible loss but later recovered after the news of Circle restoring the peg to the dollar. Circle was lucky enough to escape losses, since the US authorities guaranteed all deposits at SVB, but about $3 billion have flowed out of USDC. I suspect a bulk of these money flows went into Bitcoin.

Bitcoin Rally

Bitcoin skyrocketed by about 40% since March 9, when the SVB news became widespread.

Bitcoin (BTC/USD)

Bitcoin has vastly outperformed other coins since March 9, increasing its dominance from 43% to 48%. It may confirm the safety-seeking nature of recent flows, as investors chose the largest and likely the most credible cryptocurrency.

Bitcoin Dominance

A New Defensive Asset?

I wrote many times that Bitcoin and broader crypto usually trade like high-risk technology stocks, which can be proxied by the ARK Innovation ETF (ARKK). However, that has changed during the banking crisis. Bitcoin skyrocketed while the ARK Innovation ETF was up less than gold since March 9. During the banking crisis, Bitcoin behaved more like a levered gold than a high-risk tech.

Year-to-date performance of Bitcoin (orange), ARK Innovation ETF (green) and gold (yellow)

If the new relationship holds for much longer, it may hugely increase Bitcoin popularity among institutional investors, possibly making it a mainstream asset. High-profile asset allocators are very attuned to defensive characteristics and like assets exhibiting negative correlations with core portfolio holdings like stocks and bonds. Bitcoin has traded like 4-5x levered gold since March 9, and that makes it a very attractive portfolio diversifier. Highly levered gold with no risk of margin call and no storage costs should find a place in many institutional portfolios.

The fundamental reason behind the Bitcoin rally was the same as in previous years. It's no coincidence that US Treasuries 10-year real yield (i.e., nominal yield minus expected inflation) topped on March 8, just before the crypto rally. Bitcoin has reacted to lower long-term real yields faster and much stronger than most other assets, but a very high sensitivity to real yields was Bitcoin’s hallmark in previous years. That somewhat diminishes the argument about the new correlation, suggesting Bitcoin may rather be a leading indicator for high-risk tech and gold. Unlike crypto, high-risk tech stocks depend on the economic fundamentals. Gold, which has market cap of more than $13 trillion, may be too large to move as fast and as much as Bitcoin.

US Treasuries 10-year real yield (%)

Conclusion

The recent Bitcoin rally can probably be explained by specific factors like the failure of venture-focused bank and flows out of stablecoins, and these factors may or may not repeat next time. Nevertheless, during the current banking crisis, Bitcoin behaved more like a leveraged gold than a high-risk tech, increasing its attractiveness as a portfolio diversifier. If the new relationship holds for much longer, it may hugely increase Bitcoin's popularity among institutional investors, possibly making it a mainstream asset.

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