What banking sector uncertainty could mean for crypto markets

Last year’s collapse of several banks highlighted bitcoin’s role as an alternative asset existing outside of the traditional banking segment.

But ongoing uncertainty around banks could have a positive or negative impact on crypto market sentiment — depending on who you ask and what happens next.

The Federal Reserve created the Bank Term Funding Program (BTFP) in March 2023 — a month during which Silvergate Bank revealed its intent to liquidate, Silicon Valley Bank collapsed and the FDIC shut down Signature Bank.

The Fed program made funding available to eligible depository institutions in an effort to help banks meet the needs of their depositors. But it is set to stop making new loans on March 11.

On top of that, several investors injected more than $1 billion worth of capital into New York Community Bancorp (NYCB) on Thursday. The company, which has roughly $100 billion in assets, posted a $2.7 billion loss during the fourth quarter. Its stock had fallen to below $2 on Wednesday — down from more than $10 at the end of January.

Risk in the banking sector will remain until the Federal Reserve cuts interest rates, said Ruslan Lienkha, chief of markets at crypto platform YouHodler.

“Investors must watch the situation in the banking sector at least until the middle of this year,” he told Blockworks. “In the worst scenario, a broad banking crisis may trigger a deep correction in TradFi and in the crypto market as well.”

Still, the majority of middle-size banks are “quite far from the crypto market,” Lienkha said — noting that their main business is lending to the economy’s “real sector.”

“Talking about NYCB, there are problems but it is too early to talk about insolvency,” he added. “So I don’t think the crypto market will anyhow react in the near future until we get more new inputs.”

Banking sector instability bullish for bitcoin?

The NYCB developments came a few days before the Fed’s BTFP is set to stop making new loans to eligible segment players.

The Federal Reserve essentially removing support for smaller banks is likely to quicken consolidation in the banking sector, according to Jeff Embry, managing partner at crypto hedge fund Globe 3 Capital.

“It’s inevitable that the banking sector will increasingly centralize around the larger ‘too-big-to-fail’ banks,” Embry told Blockworks. “As the banking sector becomes more centralized, we believe this will create even more demand for decentralized crypto assets.”

The Globe 3 Capital executive noted that crypto can become a “flight-to-safety” asset in uncertain times. Bitcoin’s price rose roughly 50% in the weeks following the March 2023 bank collapses.

Samir Kerbage, chief investment officer at crypto asset manager Hashdex, said the end of the BTFP’s end could have a bit more nuanced impact on the crypto market.

The Hashdex executive said in a March 2023 blog post that the bank vulnerabilities spurred a “re-awakening” to the dangers of a “debt-laden” banking system in which customers are subject to the health of financial institutions.

“This misalignment of incentives is precisely the problem bitcoin was created to solve,” Kerbage wrote at the time.

But if the BTFP’s ceasing spurs banking sector instability, it could trigger “a massive risk-off movement” that is potentially negative for crypto, he told Blockworks this week.

“Despite this — and similar to what we saw last year — bitcoin might react positively as investors look to exit the banking system to non-sovereign stores of values like bitcoin and gold,” Kerbage added. “Unlike last year, now it is much easier for US investors to access bitcoin via the recently launched ETFs.”

The NYCB fundraise and the halt of new BTFP loans is occurring amid a crypto price rally that resulted in a new all-time high for bitcoin on Tuesday.

This price rise comes as investors have shown sustained demand for the US spot bitcoin ETFs approved by the Securities and Exchange Commission in January.

The next bitcoin halving — an event occurring every four years, during which per-block rewards for bitcoin miners are cut in half from one block to the next — is slated for next month. Such events have historically catalyzed BTC price uptrends.

“With the newly created spot bitcoin ETFs and the approaching bitcoin halving in April, we are seeing an absolute wall of liquidity entering bitcoin,” Embry said. “Add in some banking uncertainty and you could have the perfect storm for bitcoin and crypto-related assets.”

Embry noted that his firm’s bitcoin price prediction of $124,000 by the end of 2024 may now be too conservative.

BTC’s price hovered at roughly $67,250 early Friday morning — up nearly 9% from a week ago.
But Lienkha warned that the impact of crises in the economy can far outweigh the crypto market’s internal positive events, such as ETF approvals or the upcoming bitcoin halving.

He added: “From my viewpoint, the crypto market can grow only in conditions of tranquility or growth of TradFi.”

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Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.