This Crypto Bro Just Bet $1M The Banking System Dies
As fear in the traditional banking system grows, bitcoin pops
The banking system is flashing red right now, and yet bitcoin is surging. It’s now up more than 60% on the year — and at least one well-known crypto bro is literally betting that bitcoin’s price will surpass $1 million in just 90 days due to a full-blown banking system collapse.
Is it possible? After the last few years we’ve all lived, I think the only real answer to that question is “Anything’s possible.” [Proceeds to take a strong drag of a cigarette.🚬]
To be fair, calling Balaji Srinivasan a “crypto bro” is massively underselling his resume. He’s the former Chief Technical Officer of Coinbase and has been an investor in a bunch of crypto projects since departing. He was also eerily prescient in predicting what would happen with COIVD all the way back in January of 2020. So if he’s ringing the alarm bell now, it’s hard not to listen.
Of course, that alarm bell has been ringing for weeks now. As we covered with Signature Bank’s demise, the risks of having so many of a bank’s depositors concentrated in one industry can make for a very real bank run. Silicon Valley Bank’s collapse thereafter proved the same thing — but also quelled any knee-jerk finger-pointing at crypto being the root cause.
As we explained with our new Coinage episode this week, the root cause is not crypto and not crypto banks — but rather massive positions at almost all banks that are now dented as the Fed has aggressively hiked interest rates. (Please watch, like, and subscribe directly below. ⬇️)
It doesn’t take a Harvard econ degree to explain the problem US banking regulators are grappling with, but since I just paid off my student loans, let me try:
Banks usually make money by taking in deposits and doing things with that money. They might offer 1% on those deposits, but try to make 2% or 3% on those deposits by doing not-so-risky things like buying government bonds. If you can make 3% interest while paying 1% interest, you’ve got yourself a pretty good business!
The problem: As I said, the Fed has been raising interest rates very quickly. Like, historically quickly, as this chart below from my old compadre at Yahoo Finance shows.
And when interest rates rise, the new bonds the government issues carry those higher interest rates than what a lot of these banks had previously bought. And who wants your dusty-ass 10-year bond paying 3% when new ones are paying 5%? The price of the bonds that banks held, thus, trade below the price these banks originally paid to buy them. So when a bunch of customers show up and say, “Hey we want our money back!” the bank has to sell those bonds at a loss. More panic → more selling → more losses. If that continues long enough, more banks fail, and you have a system-wide failure.
So, to quell the panic that has been rising ever since regulators took over Silicon Valley Bank last week, the Fed announced that it would backstop other banks facing similar issues with a $25 billion lending program. It also announced it would offer to let banks borrow against those price-pressured bonds banks held at par value. As in, if one of those dusty ass bonds was trading at 60 cents on the dollar, banks could borrow against them at 100 cents on the dollar. JPMogran estimates this will amount to injecting about $2 trillion into the banking system.
So did the Fed save the day?
Maybe. As we’ve seen with prior bank runs, sometimes people behave irrationally. When it comes to having their savings (or company’s treasuries) wiped out, it’s better to withdraw to be safe and ask questions later. As panic has spilled over from bank to bank, others (like First Republic Bank) have faced rising losses as they sell off bonds to meet a rush of depositors asking for their cash back.
This week, Treasury Secretary Janet Yellen called the CEO of JPMorgan, Jamie Dimon, to strong arm him and other big bank CEOs to deposit cash into First Republic in a show of faith (and also maybe stop it from collapsing.) In total, 11 big banks, including JPM and Bank of America and Wells Fargo sent more than $30 billion in deposits over to First Republic. It’s unclear if that will stop fears that other banks might also need interventions like that. If not, these failures really do start adding up.
And honestly, that’s where this does become financial armageddon or not. It all comes down to confidence that things will be fine. Banks never really have all of your money in them. But you don’t care because the idea of insurance against a bank failure is supposed to prevent you from ever feeling that rush of fear of losing everything. It’s hard to say anyone feels confident right now though.
So let’s get back to Balaji’s bet. Because he’s not necessarily betting that the Fed’s move won’t work. He’s just betting that it might trigger hyperinflation that is destined to make the value of your dollars continue to dwindle away in the bank. And that … is definitely already happening, inflation is definitely real. But hyperinflation?
It’s hard to even see this crisis stoking inflation on the side of the consumer. Prices rose over the pandemic because of stimulus and a sudden shutdown/re-opening of the economy that led to people unleashing a pent-up ability to buy things and travel. As one friend I chatted with this weekend said, it’s not like anyone watching banks collapse walks away with a feeling that they should be spending more lavishly. Pocketbooks generally close faster in times of crisis.
Then again, there is certainly a case to be made that the Fed could mess this all up. They hiked rates quickly, and some banks were idiotic in not adjusting for that (or at least massively underestimated the risks of their bond portfolios losing value, and risks tied to the concentration of their depositors all being in the same industry causing a massive bank run.) But now, as the Fed pivots to maybe even lowering rates and injecting $2 trillion in liquidity, could they, in fact, be overcorrecting? Especially if the move doesn’t prevented more banks like First Republic from going down? (So far, it looks like they saved First Republic. Let’s see if that changes.)
One thing is important to highlight: This very much isn’t 2008 all over again. Recall the scene from The Big Short when Steve Carell is interrogating a stripper about her subprime mortgages. Using that example, the collateral at the heart of that crisis were promises by a stripper to pay off a fifth home. In this crisis, the collateral is literally bonds backed by the full faith and credit of the United States. (No disrespect intended to the fictional stripper at the heart of this comparison.)
The point is: Bonds trading down to be worth less is very different than sub-prime mortgages that literally became worthless. The Fed has just stepped in to let banks offload losses in an orderly fashion. Some banks will be able to absorb those losses, and others will go the way of SVB or Silvergate, or be scooped up by bigger banks on the cheap.
Personally, it has become increasingly clear to me that removing human error from banking is a necessary thing. Removing government control that privileges certain players over others is also likely a net positive. The decentralized financial applications being built in crypto provide a lot more transparency into the health of things than hoping your bank isn’t run by idiots. In the case of one of the banks that just failed (Signature) a lot of people have been speculating that maybe that was exactly the case.
In one now terribly aged corporate video, Signature executives wrote, produced, and starred in multiple musical videos about the bank in which they talk about how crazy of an idea it was that they started a bank that would do things differently than the big banks.
“What possible fate will become of our bank other than to diminish and fail?” sings the chorus of Signature executives. To which former Signature CEO Joseph J. DePaolo responds, “I happen to know for a fact that won’t happen.”
Oof.
So we shall see. But the market seems to be appreciating the security of being able to self custody bitcoin in this environment. No one can print more bitcoin, and if sovereign currencies continue to drop in value relative to a deflationary asset like Bitcoin, its dollar-denominated price will continue to rise. It’s holding up above $27,000. If you ask Balaji, next stop $1 million. 🙂