Macro Markets Themes
- The Global Banking Crisis
- Central Banks continue their fight against inflation
The Global Banking Crisis
- The month of March will be marked as a seminal point in financial history; the fragility and interconnected nature of our global financial system was made obvious as the banking crisis unfurled.
- What began on the West Coast of the US rapidly spread to Europe:
- Silicon Valley Bank (SVB) experienced a bank run i.e., customer confidence in the bank collapsed with customers withdrawing their money
- As a result, the share price of SVB nosedived in a matter of days, (see below) shocking financial markets and raising concerns that the same could happen to similar banks in the US and abroad
Source: Google Finance
- Wide-spread panic led to bank customers, globally, withdrawing their deposits en masse and transferring to either large banks or money-market funds as both are considered lower risk
- Credit Suisse, the Swiss global investment bank, fell prey to this panic, experiencing massive customer deposit outflows, requiring the Swiss National Bank (SNB) and United Bank of Switzerland (UBS), a peer bank, to step-in and stop the bleeding
- Ultimately, a banking crisis is a loss of confidence, meaning the panic and fear it causes can, in most cases, only be stymied by government and central bank intervention:
- Across the US and Europe, policymakers have issued repeated statements throughout the month to quell bank customer and investor concerns; they continue to do so
- The SNB provided direct support, a €50bn loan, and effectively forced UBS to buy Credit Suisse to restore confidence in its banking system
- In the US, the Treasury Department and Federal Reserve have provided a new loan facility – an ultimate backstop, to other banks like Silicon Valley Bank to stablise its system
- The final week of March saw this crisis subside somewhat; investor confidence has returned and the interventions by policymakers appear to have worked
- However, customer money continues to flow out of small US banks into safer alternatives like money-market funds (see chart below). Should this trend continue, it implies the banking crisis remains unresolved.
Source: Federal Reserve, MNI via Fidenzamacro.substack.com
Central Banks continue their fight against inflation
- While the banking crisis took centre stage this month, markets continue to play close attention to inflation and central bankers’ response to this major economic factor
- Major banks like the Federal Reserve, Bank of England (BOE), and the European Central Bank (ECB) stuck to their guns, and raised short-term interest rates as expected:
- Rates in the US have now increased by an effective 4.5% over the past 12 months; from 0.5% in March 2022 to 5.0% this month – this is a staggering pace of increase where we are yet to fully see the economic and financial implications
- The ECB and BOE raised rates by 0.5% and 0.25% respectively. Both banks cite the urgent need to get inflation back under control, and that as this is an ongoing process, further rate hikes are likely required
- Consumer price inflation in the US and across the EU are now firmly in a downtrend (see chart below), while in the UK, inflation remains stubbornly well above the 2% target
- Investors continue to monitor the pace of the slowdown in inflation. This will provide guidance on where central banks are in their cycle of raising short-term interest rates – further increases, pause, or rate cuts.
- Risk assets like equities and crypto will likely respond very favorably to the final option as and when it occurs
Source: Tradingview
Crypto Market Themes
- The Banking Crisis: Crypto Implications
- Shifts in the Global Regulatory Landscape: Part II
- Ethereum: Shanghai Upgrade Imminent
The Banking Crisis: Crypto Implications
- The global banking crisis has been a boon for Bitcoin. Its price has moved rapidly higher over the past month, up 23% in March and 72% for the first quarter (see table below)
- The banking fallout has brought Bitcoin’s appeal as an alternative store-of-value, like gold, strongly to the fore once more as a loss of confidence in traditional institutions such as banks mean investors seek out alternative means to protect their capital
- A clear market narrative has formed around this idea, with retail investor buying of actual BTC on exchanges being a primary catalyst for higher prices
- On-chain data show continued growth in the number of BTC wallet addresses holding at least 0.1 BTC, meaning small, retail investors are accumulating BTC at a robust pace (see chart below)
Source: lookintobitcoin.com
- A further catalyst for higher prices was the depegging of the USDC stablecoin:
- On March 11th, Circle, the issuer of USDC, informed the market it held $3.3bn of its then $43.5bn of reserves with Silicon Valley Bank
- As a result, traders broke the 1-for-1 peg between USDC and traditional US Dollars (USD) by short-selling USDC, pushing the stablecoin to a low of 90 cents per 1 USD i.e., a 10% discount
- Crypto participants, doubting whether their stablecoin holdings were truly secure sought safety by buying and holding BTC instead
- Ultimately, the USDC-USD peg restored to a 1-for-1 conversion ratio and the above fears were unfounded given that Circle had and has ample reserves to cover a potential loss in this case, and that SVB deposits were guaranteed by government intervention later in March
Shifts in the Global Regulatory Landscape: Part II
- US regulators continued their coordinated campaign against crypto firms in March:
- Coinbase received a Wells notice from the Securities & Exchange Commission (SEC), despite years of historical collaboration. A Wells notice indicates that the SEC will charge Coinbase with violation(s) of US securities laws
- The Commodities Futures Trading Commission (CFTC) is suing Binance and its CEO for routinely breaking derivative trading rules
- As a counterpoint to the increasing hostility of US regulators toward crypto, the UK government recently published a consultation document with the industry in which it seeks to position the UK as the “most open, well-regulated, and technologically advanced capital market in the world.”
- Zooming out, these developments continue to signal the longer-term shift away from the US as the epicenter of the global crypto industry to jurisdictions such as London, Hong Kong, Singapore, and Dubai which are becoming increasingly more influential
Ethereum: Shanghai Upgrade Imminent
- The date for Ethereum’s next major network upgrade has been set for April 12
- Known as the Shanghai Upgrade, it will allow validators, an on-chain entity which helps the Ethereum protocol reach consensus, to withdraw staked Ethereum (ETH) for the first time
- Approximately 15% of total ETH supply is staked vs. other major Layer-1 blockchains such as Solana (73%), Cosmos (60%), and Polkadot (47%)
- Currently, the market impact of this upgrade/network hard fork is unclear:
- Some observers suggest it could lead to large-scale selling of ETH over months following the event, as users may elect to withdraw their staked ETH and sell it
- Others indicate it may result in an influx of new users willing to stake ETH as this upgrade resolves the illiquidity risk previously faced by stakers
- Either way, as Ethereum is the second largest asset by market value, this a momentous event for the industry, one closely watched by traditional and crypto traders/investors alike
Notable News Stories
- Taiwan securities watchdog will regulate crypto | Link
- India’s crypto industry finally sees lawmakers engaging | Link
- Microsoft testing crypto wallet in its web browser Edge | Link
- Mastercard, Visa ink fresh crypto debit cards with Web 3 startups | Link
- Fidelity Crypto quietly went live, giving millions of retail customers access to Bitcoin, Ether | Link
Market Performance
Source: Bloomberg; *Annualised figures; All returns in USD.
Bitcoin Network Metrics
Source: Coinmetrics & The Block
Layer 1 Network Metrics
Source: CoinMarketCap; Artemis
DeFi Network Metrics
Source: CoinMarketCap; Token Terminal
NFT Trading Volumes Per Chain
Source: The Block
