Gold and bitcoin surge

Bitcoin broke above R470 000 in SA and flirted with $26 000 on Tuesday, as investors digested a week of frightful news from the banking sector.

First it was the collapse of crypto-enabled bank Silvergate, which went into voluntary liquidation last week. The New York Stock Exchange-listed company announced it would wind down operations and voluntarily liquidate the bank in an orderly manner so that it could repay all deposits.

Then it was the turn of the 16th largest bank in the US, Silicon Valley Bank (SVB), which was shuttered and placed in receivership by the US Federal Deposit Insurance Corporation (FDIC) on Sunday.

ALSO READ: 2022: The year that showed up crypto and added consumer protection

On the same day, Signature Bank New York was shut down by the Federal Reserve “to protect the US economy by strengthening public confidence in our banking system”.

Though the Federal Reserve assures depositors that they will get their money back, three banking failures in a week did little to assuage fears that something more profound is afoot in the global financial system.

Bank stocks in the US and around the world tanked. Nasdaq’s bank index is down more than 20% so far this year, and the JSE Banks index shed more than 7% over the last week.

Bitcoin (BTC) notched up its best three-day run since October 2019, as it brushed $26 000, and gold broke above $1 900/oz, returning it to levels last seen in February. Both are perceived as stores of value in times of risk.

ALSO READ: ‘Boring’ gold vs heart-stopping Bitcoin

Ether (ETH) broke $1 750, a level last seen in September 2022, signalling a flight to assets perceived as perhaps not as risky as they were six months ago.

Bitcoin mining stocks, some of which are highly leveraged to the BTC price, were up as much as 34% on Monday alone, with an average gain of 11%.

ALSO READ: Bitcoins are worth more than their weight in gold

The past week saw several stablecoins, notably USD Coin (USDC), depeg from the US dollar. At one point USDC was worth around $0.80 as panicked stablecoin holders offloaded at any price – apparently fearing a repeat of the Terra/Luna stablecoin collapse in 2022.

That scare was overstated, and USDC (almost) regained its 1:1 peg to the US dollar by Monday this week. Circle, the issuer of USDC, last week announced that it had $3.3 billion locked away in the now-failed SVB, but later announced that those funds would be fully available by Monday this week.

Stablecoins like USDC are crypto facsimiles of the US dollar that are backed by real assets such as cash and US treasuries. There have been instances where stablecoins have depegged from the US dollar, usually during times of market panic. The largest stablecoin is Tether, which has been the object of regulatory scrutiny for years, due to claims that it was not fully backed by liquid assets.

Curiously, this week there was a rush out of competing stablecoins into Tether, which at one point this week traded at a premium of between $1.10 and $1.03 to the US dollar.

ALSO READ: Cryptocurrencies are gaining ground across Africa – here’s why that’s both good news and bad

These events have put the banking sector on watch

The specific details of why and how SVB failed are important, says Andrew Williams, investment director, Value Equities at Schroders. “SVB’s client base was niche and overwhelmingly skewed towards technology companies. Indeed, it was set up to do precisely this back in 1983.

“A boom in venture capital funding in 2020/21 drove a near tripling in SVB’s largely uninsured deposit base, with the bank investing these deposits in long-dated securities.”

As interest rates started moving higher, those long-dated securities started losing value, which meant SVB was sitting with unrealised losses on its books. “So long as the bank didn’t have to sell the securities, the losses would remain unrealised. However, with the deposit base shrinking, SVB was forced to start selling down the securities book, dragging losses into the Profit and Loss account and negatively impacting their capital buffers,” adds Williams.

Last week management took the decision to sell $21 billion of securities and thus locked in a loss of $1.8 billion. This meant it would have to hold an equity raise to rebuild the balance sheet. It was all too late for that, as SVB chose to wind down its operations.

This may be seen as a turning point for BTC, as it has decisively broken its 200-day moving average, a technical signal that often marks the end of a bear market.

How this plays out for the banking sector remains to be seen.

Listen: Andrew Ludwig of Currency Hub and Harry Scherzer of Future Forex explain how Silvergate Bank’s collapse impacts crypto arbitrage in SA.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.