The Bitcoin price is rallying while central banks and governments are doing everything possible to stabilize our banking system. What the consequences are, and how Bitcoin is likely to react.
In a concerted effort, the major central banks agreed on a stabilization package Sunday afternoon to ensure the financial system does not run out of liquidity. Effective immediately, the U.S. Federal Reserve will offer a daily supply of U.S. dollar liquidity to the central banks of Canada, the United Kingdom, Japan, Switzerland and the eurozone. Previously, the collection of U.S. dollars was only available every week. Under this framework, central banks can exchange their domestic currency for U.S. dollars. This ensures financial institutions can quickly obtain fresh liquidity to meet their liabilities.
In the current situation, the aim is to ensure that no worries arise among financial participants that liquidity bottlenecks could occur. The uncertainty in the banking world is so great that people fear domino effects. Especially since the problems surrounding Credit Suisse are still ongoing.
The fact that Credit Suisse bondholders are not to be compensated despite the UBS takeover has caused confidence in bank bonds to collapse worldwide. The reaction to Sunday’s decision can be seen directly this Monday morning, with the opening of Asian markets. The prices of many bank bonds have collapsed in the last few hours.
The dumping of bank stocks and bank bonds is thus likely to continue this week. Or, to put it another way: Market participants are withdrawing confidence from banks. Consequently, further bank runs are likely possible in the coming days.
Be it with the freshly launched Bank Term Funding Program or the concerted action of Sunday afternoon: Every effort is being made to prevent a conflagration. In this way, the central banks sign what former ECB chief Mario Draghi said about the euro crisis in 2012: “Whatever it takes. Together with their central banks, the industrialized countries will provide as much liquidity, i.e. loans, as necessary.”
On the one hand, this is intended to calm the markets; on the other hand, it shows how serious the situation is. The fact that the U.S. Federal Reserve is shouting into the market: “No need to panic”, is not exactly boosting confidence in our financial system.
The effects of the rescue attempts can already be seen in the Fed’s central bank balance sheet. Whereas this balance has declined during the tighter monetary policy of recent months, i.e. liquidity has been withdrawn from the market, the opposite can now be observed.
Although key interest rates may still be high, the money supply in the system is being increased via other channels. The current rescue programs have thus already led to an expansion of the money supply. Finally, loans or refinancing options are being granted in a way that would have been unthinkable before the collapse of Silicon Valley Bank.
Bitcoin’s reaction to monetary policy can be read well from the price. With every further bailout by central banks and governments, it rises northward. The combination of inflation and loose monetary policy is ideal for Bitcoin, which is designed as a store of value. As a result, the Bitcoin price stands at over 28,300 US dollars on Monday morning (10 a.m. CET) and a good four per cent up on a 24-hour view.
Bitcoin with confidence dividen.
Even though Bitcoin’s rise, like that of tech stocks, is based primarily on the prospect of loose monetary policy, the confidence factor should not be ignored. States and central banks are in a permanent bailout mode, trying to offset the impact of interest rate hikes with bailouts. The result is less market and more state.