Believers in Bitcoin Celebrate Told-You-So Moment with Huge Surge as Banks Collapse

This Monday, a Bitcoin believer pounced on a chance as media personnel stood by the entrance to Silicon Valley Bank's headquarters.

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He parked his Budget moving van in front of the building's entrance so that everyone could see the message painted on its side: "BE YOUR OWN BANK," which was placed between a fictitious image of Federal Reserve Chair Jerome Powell holding a "Buy Bitcoin" sign and the orange logo for the first cryptocurrency. An account with the handle @cryptograffiti tweeted a video of the social media campaign with the caption "btc>svb" put to the soundtrack of Pink Floyd's "Money."

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In addition to a significant surge in their preferred currency, which has increased more than 30% in the last seven days, Bitcoin evangelists are relishing the moment after an epically terrible year for the cryptocurrency industry. According to them, the fallout from Silicon Valley Bank's failure only serves to highlight a significant flaw in the fractional-reserve banking system that Bitcoin was intended to address: Everything is predicated on the assumption that your money will be there when you need it.

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The traditional system "still suffers from the inherent weaknesses of the trust-based model," as stated in the original white paper that proposed Bitcoin in the wake of the global financial crisis. This weakness was overlooked by many during the period of low interest rates, but it's back in the spotlight again now.

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"About as great a Bitcoin use-case as one can envision is a scenario where increased interest rates following a time of hyper-low interest rates are driving bank runs," said Stephane Ouellette, chief executive of FRNT Finance Inc.

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Indeed, trust in the middlemen of the online market is arguably as low as or even lower than trust in local banks as a result of last year's string of crypto blowups, including the collapse of the digital-asset exchange FTX and all the dominoes in the crypto-lending area that fell after it. But, the regulations governing the expansion of the Bitcoin supply remained exactly the same, in stark contrast to the improvised and unpredictable responses by governments and central banks to the instability in traditional banking.

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The FUD, or fear, uncertainty, and doubt, which traditional banking had long used to attack cryptocurrency, is now moving in the opposite direction.    

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Although the reemergence of Bitcoin's origin tale has provided true believers with a "told you so" moment, it is not exactly what increased the coin's value during the most recent banking upheaval. The aggressive reaction from the government and Federal Reserve, which has seen tens of billions of dollars added to, or pledged to, the financial sector and significantly changed the outlook for interest rates, is widely believed to be the reason why cryptocurrency is rallying rather than fear brought on by the crisis itself.

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In other words, "money printer go brrr," to use the technical slang that bitcoin market participants favor.   

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Given the uncertainties, Noelle Acheson, the creator of the "Crypto Is Macro Today" newsletter, stated that there haven't been significant institutional or retail inflows into the market. The evolving liquidity situation, she claimed, is what's driving the market, and expectations are now converging around a considerably lower rate-hike ceiling than they were even a week ago. The current environment is favorable for risky investments, particularly Bitcoin, which has no earnings or credit risk.

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Bitcoin differs from the more ambitious crypto ventures that came after it and caused so much havoc last year because of its relative simplicity. Its "proof-of-work" model, in which miners complete challenging computational tasks to maintain the integrity of the blockchain, contrasts sharply with "proof of stake" networks, which pay yields to holders inclined to lock up their coins and which Securities and Exchange Commission Chair Gary Gensler has already said should be regulated like securities.

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However, other cryptocurrency initiatives have revealed a reliance on the financial system that Bitcoin meant to bypass, escalating tensions between both the old guard and the new. The demise of Silvergate Capital Corp. and Signature Bank, two other banks this month, was largely attributed to their reliance on crypto clients.

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The Blockchain Association trade group now claims it is investigating claims that enterprises dealing in digital assets are being kicked out of the US banking system and questions whether regulators' actions were indeed a factor in the recent bank failures.

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In addition, the previously torrential flow of venture funding that poured into brand-new digital-asset enterprises has reduced to a trickle. Before last month's financial upheaval, PitchBook reports that VC firms' fourth-quarter investments in crypto companies fell by 75% year over year to $2.3 billion.

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The current situation has led to a "back to basics" moment for cryptocurrency, according to Ryan Watkins, co-founder of Syncracy Capital.

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Not surprisingly, the many detractors and doubters of cryptocurrency continue to be unpersuaded. After all, given the infamous volatility of Bitcoin, the recent rally might vanish in an instant. 

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The three basic functions of money, according to Rob Arnott, a pioneer of quantitative investing and the founder of Research Affiliates, are to serve as a medium of commerce, a measure of value, and a store of value over time.

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He does, however, concede to having some sympathy for the laser-eye movement's goals.

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He said, "Count myself as a skeptic, but one who believes the aspirational goals of cryptocurrency are a fantastic thing because bankers are generally astonishingly ignorant. 

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On that note, he doesn't sound all that dissimilar from Cryptograffiti, the graffiti artist who backed the moving truck up to SVB's corporate offices.

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The Fed is Bitcoin's advertising agency, and our existing, dysfunctional financial system is its finest promotion, according to the unnamed artist, who declined to provide his real identity to Trade Algo due to privacy concerns. "We need a Plan B. For me and more and more people, Bitcoin is the solution."