Insight
April 28, 2023
On Monday afternoon, embattled bank First Republic reported first-quarter financial results that did little to quell investors’ anxiety about the firm’s health and the ongoing banking crisis. The announcement of a larger-than-expected drop in deposits, a workforce reduction, and the pursuit of strategic options sent the stock price reeling. While bitcoin did not initially react to the First Republic news, by Tuesday afternoon, traders had gotten the memo and sent the bitcoin price up 10%. While the banking crisis has been acutely painful for depositors, regulators, and bank executives, it has been a boon for the ownership and adoption of bitcoin, an asset built just for these types of situations.
It has been our belief, one reinforced by direct experience, that banking crises take a long time to resolve themselves. While events like the First Republic news appear to further this belief, the Federal Deposit Insurance Corp (FDIC) data show the root cause of the crisis—unrealized losses on assets held by banks, such as loans and securities, are endemic to the banking industry. According to the FDIC, at the end of 4Q22 banks had $620B of unrealized losses pent up on balance sheets. For some perspective, the FDIC’s Deposit Insurance Fund (DIF), the insurance fund set aside to cover losses on insurance bank deposits, was $128.2B at the end of 4Q22. Losses from the rescues of Signature Bank and Silicon Valley Bank cost the DIF $2.5B and $20B respectively, presumably taking the DIF to $105.7B, excluding any income and premiums earned in 1Q23 (the DIF increased $2.8B in 4Q22). And while it is extremely unlikely under any scenario that all the $620B of unrealized losses pent up on bank balance sheets would need to be backstopped by the DIF (the FDIC has the authority to borrow up to $100B from Treasury as well), the magnitude of the problem is glaring.
The ongoing banking crisis is shining a light on the underbelly of the US banking system. Most of the issues experienced by banks thus far have been due to losses sustained on fixed-income instruments in a rising interest rate environment, what we would classify as a “duration crisis”, rather than a “credit crisis”, like in the Global Financial Crisis. Borrowers' creditworthiness may come into play at some point as the economy slows down or we head into a recession, but that has yet to be a factor. And while safeguards like the DIF were put in place to ensure against these types of risks, many investors and depositors have opted out of the banking system entirely for stores of value like bitcoin. Most of us have little say in the currency we use daily, save for moving countries, but we like to think that bitcoin is the world’s first opt-in currency, for economic, ideological, or financial purposes.
Many people might know that the Bitcoin network came to life on January 3, 2009, with the creation of the genesis block by Satoshi Nakamoto; however, many might not realize that bitcoin didn’t have a “price” until well after that time. It was not until 2010 when bitcoin exchanges began to spring up and better price discovery and recorded data emerged. In the early days, price discovery was conducted peer-to-peer, with participants publicly disclosing the number of bitcoins bought/sold and the price paid. The earliest such of these transactions was on October 12, 2009, between Martti Malmi (Sirius) and NewLibertyStandard, exchanging 5,050 BTC for $5.02 ($0.0010/BTC). NewLibertyStandard also published prices starting on October 5th, 2009, but these were based on the electricity costs used to produce bitcoins ($0.0008/BTC) rather than reported secondary market transactions. Bitcointalk user dwdollar began creating the first online exchange, Bitcoin Market, in January 2010. The exchange went live in March, with the first trade reported, but apparently not recorded, on March 17th. The first reported trade data we have available today through Bitcoincharts.com from Bitcoin Market is from April 25th, 2010, 13 years ago this week. That day, 1000 BTC was exchanged for $3, marking the first public exchange price of $0.003/BTC.
It is easy to sit here today with the benefit of hindsight and bitcoin trading at nearly $30,000, a 10 million times increase from those first prices, and call those early prices silly. At the time, it was probably difficult to imagine the network's growth and the asset's success over the next 13 years. But the thing is, we could say the same thing today looking out to the future. And while another 10 million times seems like a mathematical impossibility, the fact is that Bitcoin is unlikely to fade into obscurity at this point and our guess is that its prominence only continues to grow.
Bitcoin’s realized annualized volatility continues to experience a secular decline, which may make it more appealing to investors and allocators. Bitcoin’s volatility, a measure of risk, has historically been one of the objections investors have had to owning the asset. With the continued declines, investors should find allocations to bitcoin increasingly more appealing. In comparison to gold, its real-world analog, bitcoin’s volatility also continues to decline to around 4.0x. In the context of portfolio allocation, this implies that the weighting one would place on bitcoin could be ¼ the size of a gold allocation and achieve similar risk levels. However, this ignores some other important factors for bitcoin, such as its high historical returns (and risk-adjusted returns) and its near-zero long-term correlations to other asset classes. So, in more ways than one, bitcoin might be a better version of gold than actual gold.
The price of bitcoin rose 5.7% this week driven by a sharp rally on Tuesday following the troubling financial results reported by First Republic. This rally comes after bitcoin fell through the $30,000 level last week and, although prices briefly pierced this $30,000 level this week, bitcoin could not hold that level. Equities were mixed on the week with the financials sector weighing on the S&P 500, down 1.8%. However, the tech-heavy Nasdaq Composite rallied 0.7% on the week. Gold and oil were down, with gold falling 0.5% and oil falling 3.1%. Bonds were mixed on the week with investment grade corporate bonds up 0.1%, high yield bonds up 0.4%, and long-term US Treasuries down 0.2%.
Bitcoin Price Headed for $100,000 with Crypto Winter Over: Standard Chartered - The Block
Galaxy Links Up With $821B Asset Manager as Part of Europe ETP Push - Blockworks
Coinbase Sues the SEC to Get Digital Asset-Specific Rule - The Block
Treasury Targets Actors Facilitating Illicit DPRK Financial Activity in Support of Weapons Programs - US Treasury
CFTC Commissioner Hopes to Find Path Forward in Binance Lawsuit - CNBC
Binance Faces Mounting Pressure as U.S. Crypto Crackdown Intensifies - NYT
Binance’s 650% Manpower Increase Aimed at Rehabilitating Rule-Breaker Image Amid US Crackdown - The Block
Coinbase's Wells Submission - Coinbase
Bitcoin is Still the Future of Payments, Says Lightspark CEO David Marcus - The Verge
Introducing Gemini Foundation — A Non-US Crypto Derivatives Platform - Gemini
Lightning Network Data Company Amboss Announces $4M Seed Round - Fortune
Talos and Coinbase Institutional Establish Integration - Talos
Binance US Ends $1 Billion Agreement to Buy Bankrupt Voyager Digital - Bloomberg
May 3 - FOMC rate decision
May 10 - CPI release
May 18 - Bitcoin 2023 Conference in Miami
May 26 - CME expiry
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