Cryptocurrencies have had some turbulent months in the second half of ’22, but that may now be largely over, as the excesses and carelessness of the bull market exuberance may have been largely erased by the bear market.
However, in a fiat system, the same process may be slower, and perhaps it has only just begun with the contraction of the US tech sector and the slowdown of the Chinese economy, which only recently caused some panic with the collapse of three US banks last week.
It remains to be seen what impact these collapses will have, and whether they are just the first signs of a larger financial realignment as debt becomes more expensive.
However, it can be argued that cryptocurrency has already solved its problems, whereas fiat currency may not have yet.
Cryptocurrencies may therefore be safer at this stage, and depositors and investors may want to consider this as they are reminded once again that their deposits are the bank’s money and the bank can do whatever it wants with it, including imposing losses on depositors by imposing on them bonds that they invested in collapse.
The Biden administration of course intervened, and the losses were borne not by depositors but ultimately, of course, by the public.
"Additional funding will be provided through the creation of a new Bank Term Funding Program (BTFP) to provide loans for up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledged as collateral U.S. Treasury securities, agency debt, and mortgage-backed securities, among other eligible assets. These assets will be valued at par," the Federal Reserve said.
Parity means that if you bought Bitcoin for $70,000 in November 2021, it would still be worth $70,000 as far as the Fed is concerned, not $25,000.
Replace Bitcoin with collapsing bonds or mortgages with falling house prices or any institutional debt instrument and other eligible assets and you essentially get QE ∞.0, some claim.
However, these are loans and must be repaid, so it is more about the Fed increasing available margin from price times 1 to parity times 1.
Using the Bitcoin example above, under this new system you can borrow $35,000 worth of Dai on DeFi instead of about $12,000, so you get 3x the margin.
What if the loans are not paid back? That is where the charge of printing may come in, because these banks will be bailed out. So the relaxation of lending standards is basically printed in a sophisticated way.
The public certainly doesn’t get the same convenience. Your Bitcoin or bond or stock is actually worth $25,000 instead of $70,000 of magic money, and if you have a short-term liquidity need, you have to sell it at a loss instead of getting a loan on steroids from the Fed.
So when the public had to face a bond crash, banks could hold the bonds until maturity, in which case they would not lose anything.
Even as the Federal Reserve itself suffered huge losses, caused by having to pay higher interest rates on deposits with commercial banks, the UK Treasury provided billions of dollars to the Bank of England.
These commercial banks do not fully pass on the higher interest rates to the public, so they should and are making about $100 billion in profits per quarter for the largest banks in the United States.
But if they gambled in the bond or stock markets, even those big profits might not be enough to make a profit like Silicon Valley Bank (SVB).
That bank collapsed with tens of billions in deposits, and the key is that we can't see anything, so no one knows why it really collapsed.
There are narratives and so on, mainly that they lost money on bonds, but there is no public evidence of their accounts and therefore no evidence of exactly what happened.
So when the bots criticize the fiat system for being opaque, they have an important point, because accountability is hard to enforce in a paper-based system, and you’d need some intrepid journalists or hackers to get actual evidence.
In contrast, in our crypto system, no such courage is needed because our little bot can kick in and see exactly what happened on the FTX blockchain. With this evidence, we can use strong arguments like theft without worrying about being sued by FTX because it is the truth.
At SVB we can’t quite move beyond the word collapse because it’s a black box and basically all we can say is a block box disappeared.
It’s anyone’s guess what this black box actually means, as there are no easily public relationships between SVB and other entities, like we saw between FTX and Alameda.
This is important because knowledge is power, and of course this knowledge is fundamentally evidence-based. Without it, we cannot speculate that an entire bank might fail because of a few bond losses.
As a result, SVB executives will be able to move on to other ventures, other potentially exposed banks will be able to keep quiet, and the rest will wonder if this was just a shot in the arm.
In contrast, in crypto, we identified very quickly what was impacted and what was not and how big of a repercussion it might have, and the market repriced everything so quickly and now moves on.
In fiat currencies, no one knows anything, and the lack of knowledge was a key factor in the 2008 crash, as banks began to censor themselves in a way, refusing to extend short-term interbank loans because they didn’t know which bank was risky to what extent and to what degree.
SVB is industry-specific, so the impact of its collapse may be limited, but we are in a situation where the public in the United States and China - where banks are under pressure from the collapse of the real estate market - must be more vigilant than they were before last week.
Investors have been more wary for months as they worry about the impact of a rapid rise in interest rates, as such quick changes are usually accompanied by hiccups.
So there was quite a bit of nervousness in the markets, particularly during November, but the economy remains somewhat resilient despite a sharp slowdown in the final quarter to just 0.9%.
This must be divided by 4, so the US economy grew by just 0.2% in the fourth quarter of 2022 compared to the fourth quarter of 2021, leaving it in stagnation and now likely on the brink of recession in the second and third quarters of 2023.
However, investors being vigilant is very different from the public being vigilant, because for the former, it is their job, while for the public, their job is not to pay attention to things like the safety of deposits of amounts exceeding $250,000 in the United States or just 80,000 in British pounds.
However, they do have to be aware now that some people may transfer more than $250,000 to another bank or asset, potentially including cryptocurrencies.
We think crypto should actually be an important consideration as it is faster in this collapsing business and while its collapse may be complete, it is not so clear whether the same can be said for the fiat banking industry.
Therefore, it can be argued that cryptocurrencies are safer right now, whereas in fiat currencies we do not yet know the full impact of the rapidly rising costs of debt, which most likely have not yet been fully cleared through the system at this stage.
