Last week, regulators shut down Silicon Valley Bank, a major lender to start-ups including crypto-friendly venture capital funds, after investors withdrew their deposits en masse. Following this was the shutdown of Signature and Silvergate, two of the primary banks used by cryptocurrency companies.
The collapse of these 3 major institutions linked to the crypto space led investors to think that the crypto market would also crash as firms scramble to find alternative banks to work with. Yet, two major cryptocurrencies have seen their price increase: Bitcoin prices have soared more than 27% since Friday, surpassing $26,000 per coin — their highest value since summer of 2022, and the price of Ether has also risen nearly 22% over the same period.
Bitcoin was developed following the financial crisis of 2008, in part, to help address ongoing problems with traditional finance, including those we are experiencing today. While blockchains are decentralized and transparent, banks simply are not, and this has been proven again in the past week. Although the bank failure has left a big dent in the image of the banking industry, it has acted as a real-time advertisement for self-custody assets like Bitcoin. In other words, the crypto market seems to be saying that you can’t trust a bank with your money, but you can trust the blockchain for safe custody and a store of value.
The value of the fixed income portfolios of American banks will continue to decline if interest rates increase, as is expected by the Federal Reserve. However, crypto and alternative investments might not be affected in the same way. Indeed, Gold, which has been a traditional safe-haven asset, has increased by over 5%.
Understanding that various assets and investments are affected differently by market fluctuations is key to investing your money strategically. That is why I believe that diversification is a winning strategy. By diversifying across several asset classes and regions, you raise the possibility that at least some of your investments will perform well even if others do not, especially in turbulent economic situations like we are in today.