Week Ahead with The Birb Nest – Bank Failures
Recent bank failures have shaken global financial markets. Last week, the Silicon Valley Bank failure dominated the headlines. In this blog post, we will discuss why this happened and how it directly affects the crypto market, particularly Bitcoin. Is it possible that the ongoing monetary policy of the Federal Reserve is coming to an end?
Impact of the Federal Reserve Fund Rates
This has been one of the most aggressive rate hikes in the last four decades. But first, let’s understand what rate hikes mean.
💡 Interest rates are the amount that a lender charges the borrower for the loan. In terms of the Federal Fund Rates, this is the target rate set by the FOMC to determine the rate by which commercial banks borrow and lend their excess cash (reserves) to other institutions.
Investors always keep an eye on the interest rates set by the FOMC because an increase in interest rates will make borrowing money more expensive. This will also make certain goods and services more expensive, causing consumers to spend less. This decrease in demand will cause businesses to cut down on production and lay off employees, which will increase unemployment and slow down the economy.
Higher interest rates will directly impact the bond market, as yields from U.S. Treasuries to corporate bonds will start rising, making them more attractive to investors than risk-on assets such as stocks or crypto assets. That’s why, in the past months since the Federal Reserve started raising rates, crypto assets and stocks have been declining sharply in a bear market, as they are no longer attractive to investors.
Bank Failure
The recent failure of Silicon Valley Bank, the 16th largest bank in the U.S., can be attributed mainly to the ongoing higher rates set by the Federal Reserve.
While the collapse of the cryptocurrency Silvergate Bank sparked a wave of deposit withdrawals around U.S. banks, it was not the main reason for SVB’s collapse. Instead, the ongoing high-rate environment led to startup clients withdrawing funds to keep their companies afloat. When demand for goods and services slows down, it is not good for companies. As a result, SVB found itself short on capital and was forced to sell all of its available bonds at a $1.8 billion loss. This caused panic about a possible bank run, and SVB’s stocks declined by almost 60%.
Customers withdrew $42 billion of deposits by the end of Thursday and by the end of that business day, SVB was drowning on a $959 million negative balance and wasn’t able to collect enough collateral from other sources.
Why is this important for future FOMC declarations regarding rate hikes? “Black swan events” like this have a tendency to be contagious. Investor panic could lead to massive withdrawals from banks across the US, which could result in unfortunate consequences like those experienced by SVB. The next FOMC statement is scheduled for March 22, 2023. The Fed is currently dealing with an unpleasant situation in which it must remain aggressive in order to reach its goal of 2% inflation. However, more aggressive rate hikes could potentially cause an economic collapse and recession. Expectations for the next target rate are now 95.2% inclining towards a 25-50 basis points increase.
Why this is important for the future of Bitcoin & Crypto Assets
As previously explained, a high-interest rate environment is detrimental to risk-on assets. However, it is feasible for the FED to pivot now, given the looming possibility of an economic collapse that could surpass the scale of the “Great Recession.”
It is worth noting that cryptocurrencies are not immune to broader market trends. In fact, the value of most cryptocurrencies has also significantly declined in the aftermath of these events. One of the primary reasons for this is that cryptocurrencies are still predominantly reliant on the traditional financial system. Most crypto exchanges depend on banks to process transactions and store fiat currencies. The breakdown of banks can cause disruptions in these services, which can impact the value of cryptocurrencies.
As seen in the image above, Bitcoin has declined almost 22% from the recent highs in the past 2-weeks. As for now, Bitcoin has gone up and erased almost 50% of the recent decline because of the possibility of a dovish FED in the upcoming economic calendar.
Despite these challenges, the crypto market remains resilient.
Technically Speaking
Bitcoin has rebounded strongly from the 200-day moving average and is currently trading in a range formation zone within a high volume node between the high at 25,296.10 and the low at 20,385.00. The expectation of a dovish FED in upcoming meetings could potentially drive prices higher, as speculation plays a significant role in asset prices.
A breakout from this range could push Bitcoin’s price towards the next high volume node, which is currently between 28,000.00 and 32,500.00. However, the fate of Bitcoin’s price is not set in stone, and another black swan event could quickly drive prices lower. Therefore, managing risk is crucial in this situation, especially given the current unstable geopolitical and economic environment.
The recent bank failures have significantly affected the value of cryptocurrencies. However, this is not a sign that the crypto market is doomed. Rather, it is a reminder that cryptocurrencies are still in their early stages and are subject to the same market forces as traditional assets.
🐦At The Birb Nest, we have a dedicated team of Trading Analysts who are available 24/7 to help you reach your trading goals and learn about financial markets. We’ve already shared several educational materials inside our discord that you don’t want to miss.
Don’t hesitate to reach out if you need any guidance!
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