Crypto Market Forecast: Week of March 13th 2023

The price of Bitcoin (BTC) fell by ~6.7% this week to just under ~US$21K. Ether (ETH) dropped by ~2.7% and currently trades for ~US$1.53K. while Binance-coin (BNB) fell by 3.3%, and sits at ~US$282.

The traditional financial system is in the midst of another Lehman Brothers moment as Silicon Valley Bank (SVB) suffered a bank run last week. SVB has since failed and is now under the receivership of Federal Deposit Insurance Corporation (FDIC), which also changed the bank’s name.

The situation raises questions about how the FDIC or Federal Reserve generally would be able to respond if a contagion were to spread across the banking system, potentially bringing down larger banks. (SVB was, by the way, on Forbes’ lists: “America’s best banks” for five years in a row and also its “Financial All-Stars”).

The Fed stated in 2021 that inflation was transitory and encouraged banks like SVB to use customer deposits to purchase bonds. That might have seemed like sound financial advice, if inflation was indeed transitory. But once the Fed found itself in 2022 having to aggressively raise interest rates to control inflation, the bonds that banks held became worth less and less.

Beyond the additional complication of all this happening under a fractional reserve system, where banks don’t hold 100% reserves for customer deposits, there are more implications, well-summarized by economist Peter St. Onge: “FDIC has $120 billion. Silicon Valley Bank alone had $200 billion in deposits. If FDIC runs out of money it needs a bailout: Either from a debt-ceilinged Congress or from a Fed that’s desperately trying to sell assets to bring down inflation.”

What is to follow remains to be seen. Still, the present situation is reminiscent of the round of 2008-9 bank bailouts that Satoshi Nakamoto cited as the inspiration for Bitcoin in the first place.

Circle’s USD Coin (USDC) lost its $1 peg this week after it became clear that the stablecoin had exposure to the now-failed Silicon Valley Bank. The stablecoin fell to as low as ninety cents on the dollar on Saturday, March 11th. As of the time of this writing, the peg has recovered to $0.97, still falling three cents short.

Circle published a press release stating that while its USDC token is 100% collateralized by both cash and US treasuries, it remains constrained by the traditional US banking system to issue and redeem its token. According to the press release, 23%, or $9.7B, of its total reserves are held in cash “at a variety of institutions” – with a total of $3.3B of the USDC cash backing held at SVB. Circle seems to be at the mercy of the FDIC, stating that “we remain confident in the FDIC’s management of the SVB situation and stand ready to receive these funds”.

According to the FDIC’s own website, the standard coverage limit is $250,000 “per depositor, per insured bank, for each account ownership category” – although insurance above $250,000 can be permitted in some cases. It remains to be seen how this will work out for Circle and USDC.

Crypto news for the weeks ahead

March 14

The Consumer Price Index data for February 2023 will be released – one of the indicators the Federal Open Market Committee (FOMC) watches when considering interest rate hikes.

March 21-22

The FOMC will be meeting. Possible further additional interest rate hikes will be announced. Markets are presently leaning towards yet another interest rate hike, currently expected at 25 bps.

April 2023

Ethereum’s next major upgrade since the Merge, the ‘Shanghai’ hard fork, will allow stakers to withdraw staked ETH. The Shanghai upgrade was scheduled for March but is now targeted for April.

Top 10 Crypto Summary

It was a strong week with downward price pressure for most of the digital assets in BNC’s top ten assets by market cap. Cardano (ADA) and Bitcoin (BTC) took the hardest hit. Circle’s USD Coin (USDC) losing its 1:1 peg to the USD in light of its exposure to the (now failed) Silicon Valley Bank (SVB) has affected sentiment across crypto markets.

Bitcoin Price Chart

Despite a long “crypto winter” and uncertain macroeconomic environment, there are a few Bitcoin fundamentals that stand out collectively as overwhelmingly positive. First, the total transaction count peaked to almost 382K on March 1st – a place it has only reached in brief periods in 2017, 2019, and 2020. It is worth remembering that many of the transactions are now taking place off-chain, so they aren’t even reflected in this month’s spike. Active addresses and new addresses have also continued to trend upwards – as has the Lightning Network’s capacity, now with nearly 5,200 bitcoins locked up for its use.