March 17, 2023 – Bitcoin tested US$27k overnight as the market took the Fed’s balance sheet expansion, due to the banking crisis, as the end of the quantitative tightening (QT), and potentially the resumption of the quantitative easing (QE). Moreover, JP Morgan, Goldman Sachs, and others banks will inject US$30bn to save First Republic Bank from insolvency, which underscored the risk-on sentiment in the market. Overall, there is a perception that the macro headwinds, which were preventing crypto to regain an uptrend momentum, have been reduced. Also, there has been a sort of “flight to quality” towards Bitcoin coming from altcoins and stablecoins, indicated by the increase in the major cryptocurrency dominance, and from some investors afraid of the banking system crisis, in our view.
The Fed disclosed that the banks with liquidity issues borrowed ~US$300bn, which undone almost four months of quantitative tightening (QT) in one week. According to Fortune, the Fed allocated US$143bn to collapsed banks such as Signature Bank and SVB in order to make the depositors whole. The US central bank also lent US$148bn through a program called the discount window, which usually has borrowings of only US$4-5bn in a given week. The Fed has provided to the banking system nearly half the amount that it did during the 2008 crisis. Despite some market participants not considering this a resumption of the QE, it seems very close to it, in our view.
Many in the market argue that the Fed is only lending money to stabilize the banking system, avoiding the contagion of the bank run caused by the collapse of smaller banks. Therefore, this should not be seen as the 2008 or the pandemic QE, in which the US central bank bought assets. This time, they argue, the increase in the balance sheet is temporary, and it would not be stimulative unless those receiving the reserves create money for investment or consumption. We understand the argument, but it is hard to buy that banks will only park these resources at the Fed. Indeed, the monetary authority knows that this money will hit the road, given that it prohibited the participants from having any connections with crypto, fearing that the liquidity finds its way to cryptoassets, in our view.
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