The Bitcoin price jumped above the crucial $27,800 resistance yesterday in response to the news about First Republic Bank and continues the rally above $29,000 today. As was the case after the collapse of Silicon Valley Bank and Silvergate, news of a bank collapse served as a trigger for an upward move for Bitcoin. And there are reasons to believe that the reasons won’t go away anytime soon.
Yesterday’s news about First Republic Bank (FRC) came as a surprise: its customers were withdrawing money in a big way. Deposits plunged 41% in the first quarter, as the bank announced Monday.
In Q4 2022, deposits were still at $176 billion. At the end of March, deposits were down to $104 billion, despite the fact that on March 16, other major banks infused $30 billion into the FRC. Thus, without this infusion, deposits would be at $74 billion (58% loss). According to FOX, regulators are expected to seize FRC.
The stock market reaction followed on Tuesday, with shares of the 14th largest bank in the United States taking a massive tumble. “Meanwhile, the Fed/FDIC continue to say that the banking system is ‘strong.’ There seems to be a huge disconnect here,” note the analysts at The Kobeissi Letter.
Since March 1st, shares of First Republic, $FRC, have been halted over 90 times.
The bank reported that over $100 billion in deposits were lost in Q1 2023.
Meanwhile, the Fed/FDIC continue to say that the banking system is “strong.”
There seems to be a huge disconnect here.
— The Kobeissi Letter (@KobeissiLetter) April 25, 2023
US Banking Crisis Looms As M2 Dives Deep
And there are other indications that herald even bigger problems in the US banking system. M2 money supply fell -1.2% m/m in March, the sharpest decline in 90 years. Even though the absolute level is still significantly higher than before COVID, the contraction in the money supply is historically of the highest explosive nature, as Nick Gerli pointed out in a Twitter thread.
The CEO and founder of Reventure Consulting warns that the only other times a comparable contraction happened were followed by depressions and major banking crises. Other periods of monetary contraction include the Great Depression of 1929, the Depression of 1921, the Panic of 1893, and the banking crisis of the 1870s. In all cases, there were massive bank failures.
“What’s amazing to me is how NO ONE is paying attention to this. Fed is sucking money out of the system through QT. Just while banks are at beginning of a credit crunch. And stock/real estate investors are still “risk on”. Insane,” writes Gerli, who shared the chart below.
The problem with this monetary contraction is that inflation is far from defeated and businesses are in desperate need of money right now. As Gerli notes, this is a recipe for mass bankruptcies and layoffs, especially because of the massive corporate debt bubble – $20 trillion in corporate debt by the end of 2022, double what it was in 2008.
A recession is therefore only a matter of time for Gerli, who is highly critical of the Federal Reserve:
The ignorance of the Fed to these realities is shocking. They rarely, if at all, discuss money supply. Just interest rates. But I suspect that will change over the next 3-6 months. Because if money supply keeps contracting, there will be big problems.
History backs up the claims of the expert, who sees only one hope: Banks will be aggressive with lending again in 2023, when the Fed will pivot sooner than expected, “saving the day.”
What Does This Mean For Bitcoin?
Long-term predictions are difficult, as Bitcoin has never traded in a recessionary environment. However, Bitcoin’s current reaction massively strengthens the “digital gold” narrative. Renowned analyst Ted (@tedtalksmacro) writes:
Bonds/gold/dollar bid, while equities are offered -> indicative of a flight to safety in TradFi. Bitcoin would usually be offered in such an environment, but instead it went bid… The events of 2023 thus far (banking crisis + the central bank reaction) has done wonders for BTC’s digital gold/store of value narrative.
Analyst James Choi sees a second reason for the current Bitcoin price rise, liquidity:
Second wave of regional banks hit led by the FRC is causing FED to inject more and more liquidity into the system. Market is a liquidity junkie and already pricing this in. Bitcoin is back above 28k. Commodities such as Copper, Crude Oil, Natural gas, Silver all gaining 1%+.
At press time, the Bitcoin price stood at $29,006.
Featured image from iStock, chart from TradingView.com