The crypto market has bounced back strongly following a brief episode of panic driven by the banking collapse of Silicon Valley Bank (SVB), Silvergate and Signature Bank. Worries of USDC’s stability appear long-forgotten now, as the Fed and department of Treasury bailed out SVB depositors (including Circle) and vowed to inject liquidity into banks.
This week in the ITB newsletter, we dive into the nuances of this liquidity injection and why the market has been rallying so strongly on the back of these news. We combine this with on-chain metrics contrasting Bitcoin’s and Ether’s scarcity with an increasingly abundant USD.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees reached their highest weekly amount since December 2021, as the number of transactions climb to their largest in two years
- Ethereum fees hit a nine-month high, with Uniswap v3 making up over 10% of all fees due to the strong rebound
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- Bitcoin recorded modest inflows into centralized exchanges
- $900M worth of ETH left CEXs, highest weekly amount of 2023 so far
Crypto’s Scarcity Amid the Fed’s Liquidity Injection
The past two weeks stocks and crypto move in tandem as bank crisis concerns rose and declined following the Fed’s press release to backstop SVB and other banks on Sunday. Since then, Bitcoin and Ether have increased by 21% and 13% respectively, while the Nasdaq climbed 7%, all recouping most of their monthly losses.
Why Are Risk Assets Rebounding? Markets are seeing increased odds of interest rate hikes slowing down while liquidity increases
- The rapid interest rate hikes hit banks such as SVB with hundreds of billions in unrealized losses in treasuries, since bonds’ value move inversely to their yield
- This has led future bond yields to decline as investors likely believe the Fed will reverse course or at least slow down rate hikes to avoid further damaging banks
- Moreover, the Fed introduced the Bank Term Funding Program (BTFP), which will allow banks to issue loans against their bond holdings
- By increasing capital available to banks, the BTFP is expected to lead to greater credit creation and increase total liquidity by $2 Trillion per a JP Morgan estimate
Liquidity Increases Asset Prices — As we saw during 2020 and 2021, markets rallied as capital abounded
- Much of 2022’s price drop came due to a combination of quantitative tightening and increasing interest rates taking liquidity out of the system
- Global liquidity has now been reversing higher since September, roughly coinciding with the point when the Nasdaq and S&P 500 reached their bottom
- While it is still to be seen whether the liquidity injection from the BTFP will be as large as the $2T estimated, markets are likely rallying in anticipation of the “money printer” being back on the table
Digital Scarcity
In sharp contrast, Bitcoin is set to decrease its issuance rate a year from now. Perhaps more importantly, though, Bitcoin’s existing supply is scarce as a virtue of its long-term believers.
Hodlers’ Bags Continue to Grow — The amount of BTC owned by addresses holding for over one year just set a new all-time high
- Bitcoin hodlers now own over two thirds of all circulating supply
- Following the BTFD mantra, this group of addresses typically increases their holdings in the bear market, as we saw in 2022
- If history rhymes, this group is unlikely to start selling their holdings until we reach close to the previous all-time high ($69,000)
- This points to Bitcoin’s scarcity as the majority of long-term holders have been historically unwilling to sell shortly after the bottom
ETH also has similar, and perhaps even scarcer, dynamics at play.
Deflationary Mechanics — Due to a portion of Ethereum transaction fees being burnt, Ether’s supply has been declining in 2023
- Since the transition to proof of stake, Ether’s supply has shrunk by 66k (~$110M), literally making it more scarce
- In addition, ETH hodlers’ also own 63% of all Ether pointing to high conviction investors just as with Bitcoin
Overall, this combination of scarce digital assets and increasing global liquidity is likely to help support crypto-asset prices throughout the rest of the year. Though there may still be short-term uncertainty regarding the status of worldwide banks, it seems that the worst of macro fears may be behind us as the Fed intervenes. Circumstances are different now than in 2020 where interest rates where at near-zero so we may not see a full-on bull run yet, but future prospects for crypto are certainly looking brighter than they did just a few weeks ago.
All Comments