Wealth

Bitcoin Versus Banks – The Irrelevant Investor

Something happened in crypto this week that has never happened before. It acted as a safe haven.

Prior to the most recent period, every time the market fell, Bitcoin fell more. A few examples below:

  • From January 2018 through April 2018, the S&P 500 fell 10%. Bitcoin fell 35% over the same time.
  • From September through December 2018, the S&P 500 fell 20%. Bitcoin fell 43% over the same time.
  • From February through March 2020, the S&P 500 fell 34%.  Bitcoin fell 54% over the same time.
  • From January 2022 through October 2022, the S&P 500 fell 25%. Bitcoin fell 60% over the same time.

I fully understand that today’s market looks nothing like the previous episodes above. In fact, the S&P 500 is down less than 1% since March 9th when we first learned of SVBs troubles. The risk I’m talking about was contained to a very specific and important area of the market, the banks.

Last week, Bitcoin outperformed XLF by 40% over a seven-day period. And it did so while XLF was in a 20% drawdown. The only other time that happened was after the Covid bottom in March 2020, which is nothing like today. Before the bottom, Bitcoin was cut in half in a single day. And then it snapped back, leading to that 40% outperformance. In no way shape or form was that the same thing we saw last week.

I am more of a crypto believer than most people in traditional finance, but I’m hardly a zealot. The comments I’m about to make are not from someone who lives or dies with the success or failure of crypto. With that out of the way, I think the recent move makes sense if you think of this through the lens of human nature.

Crypto was born in the ashes of a financial crisis. It was inspired by the lack of trust in financial institutions. With the blockchain, everything could be verified in real-time. These are my coins and I can prove it. I can move them whenever I want to whoever I want instantly, for almost no cost, and nobody can stop me from doing it.

The attractiveness for a system like that got a whole lot more attractive after the events of the last couple of weeks. Silicon Valley Bank was a top 20 bank in the United States. And then a few people yelled fire and all the customers ran out the door. Or, enough people that the bank had to be taken into receivership. And then the same thing happened at Signature Bank. And Silvergate. And Credit Suisse. And who knows how many others might be in trouble?

Yeah, Bitcoin is volatile, but at least I know that it’s mine. I don’t have to worry about the government stepping in (or not) to backstop me the same way I do if I’m at a bank that people don’t trust.

“You don’t think your money is safe at JP Morgan?!?!?!?!”

Of course I do. But Bitcoin is not domiciled in the United States. Imagine you’re in a country that has a banking system prone to failure? Or a government that has the ability to seize assets? In places like that, Bitcoin just became more than a speculative asset. It became money.

 

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