Why Bitcoin could finally decouple from global stock markets

The cryptocurrency has come into its own as a hedge against another financial collapse

As the purchasing power of the US dollar deteriorates, investors begin to look for alternative safe havens like Bitcoin. EPA

Last week, the US Federal Reserve raised interest rates by another 25 basis points, despite the drama engulfing the US banking sector.

The European Central Bank (ECB) is also sticking to its rate-hiking guns, even as contagion from the US sends ripples through the European banking sector, with Credit Suisse being taken over by UBS.

Meanwhile, the UK continues to grapple with runaway inflation.

This begs the question: will we see higher rates for longer and what will be the impact on cryptocurrency markets?

It appears central banks remain intent on rate hikes, despite the detrimental effect this is having on smaller banks.

The Fed is not alone in this. ECB chief Christine Lagarde indicated last Wednesday that the central bank’s intentions to continue hiking until inflation was firmly under control.

Although the ECB has already raised rates by a record 350 bps since July 2022, eurozone inflation remained high at 8.5 per cent for February.

On the same day, the UK Office for National Statistics (ONS) released its February consumer price inflation data, which surprised on the upside with a 10.4 per cent annual increase.

This is up from 10.1 per cent in January and suggests Britain’s battle with the cost-of-living crisis is far from over.

The news puts renewed pressure on the Bank of England to continue its own rate increase cycle, as the economy shows no signs of cooling.

In fact, Trading Economics is now predicting the US federal funds rate to remain above 4 per cent throughout 2024, while rates in the UK and eurozone are expected to come down by just 50 bps from current levels by the end of next year.

Yet, even as the world’s central banks are raising rates, they have simultaneously turned on the liquidity taps once again.

QE is back

Last week, the Fed, along with five other major central banks, announced an unprecedented “joint liquidity operation” to support struggling local lenders and avoid another 2008.

US regional banks have grabbed this lifeline, leading the Fed’s balance sheet to expand by $297 billion to $8.63 trillion in just one week and undoing much of its quantitative tightening programme.

In short, QE (quantitative easing) is back — despite the Fed’s claims to the contrary. And, as can be expected, this is having a detrimental effect on the US dollar, which has been trading lower against a basket of currencies over the past two weeks.

All this is good news for cryptocurrency prices. As the purchasing power of the US currency deteriorates, investors begin to look for alternative safe havens.

Unlike the dollar, Bitcoin has a built-in supply cap, so it’s an obvious antidote to rampant money printing.

This is just one of the reasons we saw the biggest cryptocurrency fly past the $28,000 mark last week, helping it climb nearly 70 per cent year-to-date.

Loss of faith

More importantly, as bank runs threaten to destabilise the entire financial system once again, Bitcoin comes into its own as a hedge against another financial collapse.

The demise of Silvergate and Silicon Valley Bank, and the fallout that ensued, has highlighted the fact that the existing financial system is broken and the cracks are starting to show.

Any actions taken to fix it after 2008 have clearly failed, as banks once again find themselves at the mercy of government bailouts.

The only difference this time is that government bonds are responsible for their downfall, not mortgage-backed securities.

With interest rates continuing to rise, pushing up yields on these bonds, it is clear the fallout is far from over.

As skittish depositors head for the door, smaller banks are particularly at risk of further bank runs.

In fact, banking giants such as Bank of America are reportedly receiving inflows of funds from smaller banks, as the sector faces a crisis of confidence.

Cryptocurrencies — in pictures

The crypto market, which includes currencies such as Bitcoin, pictured, has lost $2 trillion of its value in six months. Unsplash

The price of Ethereum, the second largest cryptocurrency by market size, has fallen by 70 per cent this year. Investors and analysts are watching to see if it will dip below $1,000. Unsplash

Dogecoin, supported by Elon Musk, is about 90 per cent down from May last year, yet it is outperforming Bitcoin and Ethereum in the current crash. Unsplash

The government of El Salvador has invested $105 million in Bitcoin. President Nayib Bukele's embrace of the cryptocurrency as legal tender is being questioned as the market crashes. Getty

Changpeng Zhao, founder of crypto exchange giant Binance, has compared the current market turmoil to the dotcom bubble of the early 2000s. Still, the company is aggressively pursuing licensing in international jurisdictions and introducing new products. Getty

Tether is the biggest issuer of stablecoins, a type of cryptocurrency pegged to a traditionally stable asset like the US dollar. Most stablecoins are meant to maintain a constant price of $1 and are backed by real reserve funds, making it easy to convert crypto investments into cash. But Tether's financial statements show that may not be true, leaving the issuer and its investors vulnerable. Unsplash

The recent crypto crash can in part be attributed to the collapse of TerraUSD, a stablecoin pegged to the US dollar through algorithms and linked to a "sister" cryptocurrency named Luna. When the price of Luna plummeted, TerraUSD also fell, creating a “death spiral” to practically zero for both coins. Unsplash

On June 12 crypto lender Celsius Network said it had paused customer withdrawals, saying it needed “to stabilise liquidity and operations”. Investors are still waiting, with no signs that the current meltdown will let up. Getty

The only game in town

As trust in banks and governments is rapidly eroded, Bitcoin will remain the only game in town.

Let’s not forget that it was born as a direct result of the previous financial crisis, with the aim to build a better and fairer financial system.

And, while last time there was nowhere to hide, this time there’s an alternative for those losing faith in the establishment.

This is precisely why Bitcoin is rallying amid the doom and gloom, even shrugging off the latest US rate hike.

In the coming months, as contagion spreads through the banking sector, we could see the long-anticipated decoupling of Bitcoin from global stock markets as it continues its journey upwards.

It’s time we finally learnt our lesson and stopped trusting a centralised system that has let us down again and again. The future is decentralised — and this is just the beginning.

Stefan Rust is chief executive of independent inflation data aggregator Truflation and former chief executive of bitcoin.com