Crypto went through some turbulent months during the second half of ’22, but that might now largely be over as the excesses and carelessness of the bull exuberance might largely have been erased by the bear.
In the fiat system however, it might be the same process is slower and perhaps it has only began as the contraction in the US tech sector and the economic slowdown in China only recently gave out some jitters with the collapse of three US banks last week.
What effect these collapses will have and whether they are just the first sign of a bigger re-adjustment in finance as debt becomes a lot more expensive, is to be seen.
Yet, it might be somewhat safe to say that crypto has sorted out its problems, while fiat might have not quite yet.
And thus crypto is perhaps safer at this stage, something both depositors and investors might consider as they’re reminded once again that their deposits are the bank’s money and the bank can do whatever it wants with it, including investing them in crashing bonds to depositor losses.
The Biden administration has of course intervened with the losses not to be born by the depositors, but ultimately by the public of course.
“Additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par,” said the Federal Reserve Banks.
At par means if you bought bitcoin at $70,000 during November 2021, then as far as Fed is concerned, it is still worth $70,000, not $25,000.
Replace bitcoin with crashing bonds, or mortgages which are seeing house prices fall, or whatever agency debt means and other qualifying assets, and basically you get quantitative easing ∞.0, some claim.
These are loans however, and they have to be paid back, so it is more Fed is increasing the margin available from price times 1x to par price times 1x.
As an example with the above bitcoin, you’d be able to borrow $35,000 worth of Dai on defi under the equivalent of this new system, rather than about $12,000, so you’re getting a 3x margin.
And what if the loans are not paid back? That’s where the printing accusation can potentially come in because these banks will be bailed out. So the loosening of lending criteria is in a complex way basically printing.
The public of course is not being offered the same facility. Your bitcoin or bond or stock is actually worth $25,000, not $70,000 in magic money, and if you have short term liquidity needs, you have to sell at a loss rather than get steroided loans from Fed.
So while the public has to face the bond crash, banks can hold their bonds until maturity, in which case they won’t have any losses.
This is even while Fed itself is seeing huge losses, with the Treasury in UK giving the Bank of England billions due to losses arising from having to pay higher interest rates on deposits from commercial banks.
Those commercial banks are not quite passing on those higher interest rates to the public, so they should and are making some $100 billion in profits a quarter for just the biggest US banks.
But, if they’re gambling away in the bond market or stock market, then even those huge profits might not be enough as in the case of the Silicon Valley Bank (SVB).
That bank went under with tens of billions in deposits and crucially we can’t see anything so no one has a clue as to why it really collapsed.
There are narrations and so on, chiefly that they lost money in bonds, but there is no publicly available evidence of their accounts and thus of just what happened exactly.
So when bots criticize the fiat system for being opaque, they have a significant point because it is very difficult to implement accountability in the paper system where you’d need some brave journalist/s or maybe hackers to get the actual evidence.
In our crypto system in contrast, no such bravery is needed because our little bots can go off and get exactly what happened at FTX on the blockchain. Armed with that evidence, we were able to use strong words like theft without fear of being sued by FTX because it’s the truth.
While at SVB, we can’t quite move beyond the word collapse as it’s a black box and basically all we can say is that a block box disappeared.
Just what that means exactly, this black box going, is anyone’s guess because there are no easily publicly available relationships between SVB and other entities, like we could see between FTX and Alameda.
And that matters because knowledge is power, with that knowledge of course fundamentally based on evidence. Without it, we can’t speculate that there’s maybe a bit more to a whole bank going under due to just some bond losses.
So the SVB executives will be able to go off to other ventures, other banks that might be exposed will be able to keep quiet, and the rest will be left wondering is that it or was that just the firing shot.
In crypto, in contrast, we fairly quickly established just what was and wasn’t affected and how far it might all reverberate, with the market so quickly re-pricing everything to now move on.
In fiat, no one knows anything and that lack of knowledge was one key contributor to the 2008 collapse because banks started self-censoring in a way in refusing to extend short term inter-banking loans as they didn’t know just which bank was exposed to what and to what extent.
SVB was sector specific however so the effects of its collapse might be limited, but we are in a situation where the public both in US and in China – where banks are under pressure due to the property market collapse – have to be a bit more alert than they were prior to last week.
Investors have been more alert for months now because they’re worried about the effects of the very fast hike in interest rates as usually such speedy changes come with hiccups.
Hence, especially during November last year there were quite a few jitters in the markets, but the economy has maintained some robustness even though the US economy has significantly slowed down to just 0.9% in the last quarter.
That has to be divided by 4 so the US economy grew by just 0.2% in Q4 2022 over Q4 2021, putting it into stagnation territory and potentially now on the verge of a recession maybe in Q2 2023 and Q3.
Investors being alert however is quite a bit different from the public being alert because for the former it is sort of their job, while for the public their job is to not pay attention to things like deposit safety for sums over $250,000 in US or just £80,000 in UK.
Yet, they do have to pay attention now and some may be moving sums above $250,000 to a different bank or to assets, including perhaps cryptos.
We’d argue that crypto in fact should be a significant consideration because it is faster at this crashing business, and while its crashing might be done, it’s not very clear whether the same can be said for fiat banking.
Hence crypto is now safer, arguably, while in fiat we do not yet know the full effects of the speedy hikes in debt costs which most likely has not quite fully cleared through the system at this stage.