Many investors are still sleeping on bitcoin’s potential as an alternative financial system, but the U.S. banking crisis is setting the stage for a crypto revolution that will lead bitcoin through its next phase of adoption, says Bernstein. Bitcoin was originally designed, after the 2008 financial crisis, as digital cash that doesn’t rely on banks. Not long after it was created, however, many of its holders began comparing it to gold due to its low correlation with other assets, which made it seemingly useful as a store of value and a hedge against uncertainty. More recently, it’s been trading like a high risk tech stock, thanks to the latest wave of new adopters. That’s been changing since the latest banking crisis began, however, as everyday people have witnessed deposit runs and bank failures on regulated U.S. banks triggered by high interest rates — namely Silicon Valley Bank and Signature. This week, continued troubles at First Republic Bank helped drive bitcoin’s price action again. “The gap between Treasury rates and bank deposit rates will continue to hollow out banks, with weak balance sheets leading to another round of mass-migration to money markets,” Bernstein analysts Gautam Chhugani and Manas Agrawal said in a note Wednesday. “To rescue the ship, the Fed will have to resort to dollar debasement and monetary printing again, bringing back the role of Bitcoin as digital gold.” “What will follow, in our view, is a new crypto cycle, led by mass-migration to self-custody wallets used as on-chain savings accounts and a cambrian explosion of financial innovation on the blockchain.” The shift back to the digital gold narrative has started, since the recent deposit runs and bank failures on regulated U.S. banks, triggered by high interest rates. By mid-March, bitcoin’s correlation with both gold and the S & P 500 had inverted. A couple weeks later its gold correlation surpassed its Nasdaq correlation. That could be just the beginning, the analysts said. “As second-order effects of deposit runs continue (credit freeze, margin pressures, asset quality issues), we expect the banking sector to start revealing cracks, pushing the Fed to debase the dollar sooner,” the Bernstein analysts said. Eventually, and perhaps not too far off, the pressures on traditional banks will push customers to adopt the most basic tenets of crypto, like self-custody and transparency, into their own banking experiences. The idea that an individual could “be their own bank” may have been too futuristic for the mainstream over the past decade, but Bernstein says that day is drawing nearer. “The safe haven signal will lead to a new crypto cycle, pushing digital wallets as on-chain savings accounts,” the analysts said. “Each cycle pushes forward the crypto adoption curve led by a key innovation and more mainstream adoption. We believe 2023 will be about hyper-scaling, growth of self-custody wallets and adoption of decentralized finance by both retail and institutional participants.”
