NEW DELHI (CoinChapter.com) — Bitcoin came into existence as a response to the 2007-08 crisis to become a medium that would disintermediate traditional banks from financial transactions.
Over time, the world’s first cryptocurrency transitioned from a peer-to-peer payment system to a store of value. As a result, proponents of the token started calling Bitcoin “digital gold,” a haven investment option that would safeguard investments during economic turbulence.
Interestingly, BTC price initially stuck to the narrative, but as Bitcoin’s popularity spread, the narrative started failing. Analysts blamed the crypto’s growing correlation with traditional risk assets like stocks for the fall from grace.
James Davies, CPO at Tacans Labs, says, “As Bitcoin experiences more mainstream adoption, it becomes less of an outlier,” highlighting events like El Salvador’s adoption of BTC, firms like Tesla investing in Bitcoin, etc.
People started treating it [Bitcoin] as tech stocks. In fact, the correlation between cryptocurrencies and the stock market reached an all-time high.
Davies told Coinchapter.
The recent turmoil in the US banking sector pushed Bitcoin prices to new multi-month highs. The price action suggests that whatever investor faith the banks lost, Bitcoin gained. Stefan Rust, CEO of data aggregator Truflation, noted the crypto token’s rally during the banking crisis.
Rust echoed Davies’ sentiments regarding the reasons behind BTC’s rising correlation with traditional market instruments. The Truflation founder noted that institutions that used to denounce Bitcoin, such as JP Morgan, did a turnabout on their stance once the OG crypto’s influence spread.
It has been very interesting to see bitcoin trade up during the banking wobbles of the past few weeks. Indeed, Bitcoin’s price increased 46% between March 10 and March 24 – an enormous surge in value by any estimation
Stefan Rust pointed out
Bitcoin Performance Major Economic Crises
The Cypriot Financial Crisis
The 2012-13 Cypriot financial crisis resulted from the exposure of Cypriot banks to overleveraged property firms and the Greek government debt crisis. As a result, rating agencies downgraded Cypriot government bonds’ credit rating to junk.
It took an international bailout of €10 billion and a promise to close the country’s second-largest bank (Cyprus Popular Bank) to help the government recover. Additionally, the government imposed a one-time levy on all uninsured deposits at the bank.
As the banking system collapsed in Cyprus, Bitcoin rallied upwards.
Between Jan 1, 2012, and March 26, 2013, BTC prices rose nearly 2018% to $97. Unfortunately, the rally fizzled out in April.
In a research note, Nicholas Colas, Chief Marketing Strategist at ConvergEx, commented on BTC price action in 2013, stating he was surprised at BTC’s rally given its “novelty and nascent infrastructure.”
The bottom line here is that incremental demand for Bitcoin is coming from the geographic areas most affected by the Cypriot financial crisis — individuals in countries like Greece or Spain, worried that they will be next to feel the threat of deposit taxes
Greek Government Debt Crisis
Greece became the victim of the Great Recession of 2007-08. The crisis resulted in structural weaknesses in the Greek economy and a lack of flexible monetary policy. Furthermore, the turmoil revealed that the government underreported its debt levels.
The recession in Greece was the longest for any advanced mixed economy in history, lasting for nearly eleven years between 2009 and 2019. The crisis resulted in a loss of confidence in the Greek economy and forced the government to enact 12 rounds of tax increases.
Moreover, in 2015, Greece became the first developed country that failed to repay an IMF loan repayment on time.
In 2009, Bitcoin was trading at pennies, with the first transaction that gave BTC monetary value pricing BTC at $0.0009 per token. Compared to BTC price on Jan 1, 2020, Bitcoin rocketed more than one billion% in the 11 years it took Greece to recover.
It would be hubris to claim that Bitcoin rose during the Greek economic crisis. However, various exchanges noted a sharp increase in activity from Eurozone countries like Greece.
It would be safe to speculate that the Greek economic crisis played a significant role in establishing Bitcoin as a store of value.
The COVID-19 pandemic resulted in the second-largest global recession in recent history. Global lockdown halted trade and commerce, shrinking economies and forcing even developed economies into massive debts.
Inflation rose globally, forcing countries like the US to raise federal interest rates to historic highs. However, global earnings declined as the pandemic wreaked havoc on the stock markets, global supply chain crisis, price gouging, etc.
The COVID-19 recession, which began in most countries in Feb 2020, is ongoing. The impact has been felt across sectors, from oil prices to the commodities market.
It was during the COVID-19 crisis that Bitcoin’s digital gold narrative started to fail. Between Feb 2020 and Nov 2021, BTC price rose 660% to mark an ATH of $69,000 (Bitstamp) on Nov 8, 2021. However, the rally started faltering in Dec 2021, starting with a sharp decline post China’s Evergrande mishap.
The multiple crypto-related crises in 2022, from the Terra-LUNA fiasco to the FTX collapse incident, did not help Bitcoin’s cause. Nevertheless, the token had garnered institutional investor interest during its bull run to the Nov 2021 ATH.
As a result, when large investors’ stocks suffered due to macroeconomic and geopolitical issues during the COVID-19 recession, BTC prices mirrored the downtrend.
Taylor Johnson, the co-founder of PsyFinance, pointed out that the rise in inflation and recession-related FUD were “likely cause of capital flow towards more risk-free assets.“
When asked what he thinks is the reason for Bitcoin’s failing as digital gold, Johnson said,
It’s hard to attribute this [failure of digital gold narrative] to specifics as each macro economic event is different. It’s worth noting that there can be significant leverage in crypto markets and times of increased volatility typically cause a deleveraging.
Recent Banking Crisis Reigniting Digital Gold Narrative?
Meanwhile, Bitcoin’s rally during the US banking led several proponents to claim that the token’s digital gold narrative remains intact. For example, Samuel Cohen, head of business development at Foreman Mining, stated the banking crisis highlighted the “fragility of centralized financial institutions.“
Cohen highlighted the shortcomings of the existing fractional reserve banking system, stating it was vulnerable to a collapse due to a bank run. However, the Foreman executive claimed that Bitcoin’s decentralized ledger system safeguards the crypto from the traditional banking system’s faults.
By eliminating the need for intermediaries like banks, Bitcoin provides users with greater control over their financial assets and reduces the risk of systemic financial crises caused by fractional reserve banking.
Samuel Cohen told CoinChapter
However, a relief rally amidst a banking crisis does not resuscitate Bitcoin’s haven status. The token’s rally seems to have run out of gas as the BTC price consolidates below $29,000.
Mergers May Not Be All Good, Say Experts
Cohen was not the only one who criticized the traditional banking system. Several financial and crypto experts that CoinChapter reached out to believe that the inadequacies of the traditional financial system led to the banking system turmoil.
Regulatory bodies had to intervene and force mergers to help struggling banks, with the US Federal Reserve and the Treasury Department creating a fund to advance bank loans.
Though mergers helped stabilize the banking sector, they also resulted in fewer banks for customers. Oliver Rust, Head of Product at Truflation, noted that mergers increased a bank’s balance sheet, forcing banks to shore up the risk. As a result, the cost of capital increases.
A decline in the number of banks would make the remaining few banks “ too big to fail, which, as we learned in 2008/09, can have very negative consequences,” Rust said.
Igor Mandrigin, CTO at Gateway.fm, told CoinChapter that though mergers mitigate the risk of bank runs, the buyer is essentially at a loss since they are buying a bad asset.
PsyFinance’s Johnson mirrors Mandrigin sentiments about forced bank mergers. Moreover, Johnson pointed out that forced mergers removed jobs from the economy. Additionally, smaller banks would have trouble retaining customers as larger banks inspire more confidence in deposit security.
Tacans Labs’ Davies also highlighted the human aspect of bank mergers, focusing on the “havoc in company culture.”
Another major issue that I can think of is compliance handling. Each company/bank has its own compliance and risk-handling methodology.
James Davies told CoinChapter
CoinFlip CEO Ben Weiss was bullish on the crypto sector’s prospects in light of the recent bank implosions, stating he was “ certain that de-fi will have its day again shortly.“
Bitcoin has undoubtedly become a store of value, but there’s a long way to go before it becomes digital gold.
A Delhi-based Markets writer, I did my bachelor's in engineering with major in electronics and communications. I first heard of bitcoin while writing an article about blockchain technology a few years back, and have been following it ever since. Bitcoin may well be current big thing happening in the finance industry, and it feels like the right time to join the crypto bandwagon.