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Money flight: people in the U.S. began to actively buy cryptocurrencies and gold amid banking crisis

Photo by Christopher Campbell on Unsplash

On Friday, April 14, trading on the global cryptocurrency market is accompanied by a significant appreciation of digital assets. Bitcoin rate rose by 2.1% in the middle of the day and reached $31.04 thousand for the first time since June 2022, while the cost of etherium rose by 5.8% to $2.13 thousand – the highest level since May 2022. This is evidenced by the data of TradingView platform.

Both digital coins began to steadily rise in price from mid-March and rose in price by about one and a half times in the past five weeks. It is noteworthy that precious metals quotations show similar dynamics.

Thus, the price per troy ounce of gold for the previous month increased by more than 12%, up to $2.05 thousand, and silver – by 30%, to $26.07. Last time similar values could be observed in March – April 2022.

“Such dynamics may indicate that the capital market is looking for an alternative to usual investments. Interest in cryptocurrencies and precious metals has increased noticeably against the background of problems in the banking sector in the U.S. and the European Union,” economist and BitRiver Communications Director Andrey Loboda told .

Recall that in the first half of March 2023, three banks – Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank – with total assets of nearly $331 billion went bankrupt with a difference of a few days. The first two were among the top 30 largest financial institutions in the country.

After the incident, American President Joe Biden appealed to citizens and assured them that the banking sector “remains safe”. In turn, the Treasury Department and the U.S. Federal Reserve System (which serves as the country’s central bank) announced extensive measures to support the industry.

Nevertheless, the news about the collapse of three large companies provoked panic among depositors and stock market participants. As a result, the value of the shares of a number of banks, especially regional ones, began to decline sharply.

Meanwhile, the cheapening of U.S. credit institutions’ securities was followed by a collapse of stock exchange quotations in Europe. As a result, for example, the second largest bank in Switzerland, Credit Suisse, founded back in 1856, was on the verge of bankruptcy and was eventually absorbed by the country’s largest financial holding UBS.

According to the latest data from the U.S. Federal Reserve, as a result of the banking crisis that broke out in the country American depositors withdrew from their deposits from March 1-29 almost $500 billion. The outflow of funds from deposits that occurred in less than a month was the largest during all time of monitoring – since 1973. Some of this money could have been transferred to precious metals and cryptocurrencies, experts do not rule out.

“People stop trusting the banking system and fear its collapse, so they are looking for ways to save their savings. Conservative citizens invest money in traditional safeguards – coins and bullion in gold and silver, as well as opening metal accounts. Younger investors, who believe in the great future of digital assets, prefer cryptocurrencies,” Artyom Deyev, head of the analytical department of AMarkets, explained .

Artyom Deyev believes that the main reason for the banking crisis in the U.S. was a sharp tightening of the Federal Reserve’s monetary policy. For example, in 2022, after the imposition of energy sanctions against Russia, the United States fuel prices rose sharply and inflation accelerated. To combat the price hikes, the Federal Reserve began to actively raise its interest rate, although it had previously held it near zero for a long time.

Over the last year, the U.S. regulator has raised the bar nine times already and brought it to 4.75-5%. The value was the maximum for the last 16 years.

Traditionally such actions are considered one of the main tools in the fight against inflation. By raising interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which allows to slow the growth of prices.

In addition, the Fed’s decisions are reflected in the U.S. market for government bonds (Treasuries). Companies and people usually buy these securities to save their money, essentially lending their money to the U.S. economy, and get a return on it in the form of interest. As the Fed’s rate increases, the yield on the Treasuries increases, but their value decreases.

According to experts, in recent years, U.S. banks have invested in debt securities in the United States a significant amount of money, including their depositors’ money. Meanwhile, against the background of a sharp increase in the Fed rate and cheapening of treasuries portfolios of credit institutions began to depreciate rapidly.

“In the period before the Fed rate hike, banks took on excessive risks. And neither the bankers themselves nor the regulator thought about what would happen if the accumulated assets in the form of long-term U.S. government debt started falling in value. When the scale of the problem became known to depositors, they realized that they could really lose their savings, and rushed to withdraw them. So within a couple of days, the capital of some banks was almost completely lost,” Valery Emelyanov, a stock market expert at BCS World Investments, explained to .

To help the banking sector, the Fed was forced to return to the practice of the times of the pandemic and the financial crisis of 2008 – he again launched the printing press. According to the latest estimates, since the beginning of spring the regulator poured into the financial system more than $275 billion.

Though the bankruptcy of financial organizations in the USA have stopped so far, the present crisis is far from being finished, as the biggest bank of the country JPMorgan Chase is sure. Moreover, as the company believes, the consequences of the current events will be felt for many years to come.

“Of course, we hope that everything will pass and all these storm clouds will peacefully and painlessly disperse… At the same time we should be prepared for a new and uncertain future… The failures of SVB and Credit Suisse have significantly changed market expectations… the chances of recession have increased,” JPMorgan Chase head James Dimon wrote in a letter to investors.

The Federal Reserve System also expressed its concern about the current situation. Thus in view of new conditions the management of the American regulator revised the forecast for the economy of the states in 2023 and now doesn’t exclude the probability of GDP decrease in the country.

“For some time, the forecast for the U.S. economy, prepared by the Federal Reserve staff, envisioned restrained growth in real GDP this year and a slight slowdown in the labor market. Given the staff’s assessment of the potential economic consequences of recent events in the banking sector, their forecast at the March meeting envisioned a mild recession beginning later this year,” the Fed said.

Meanwhile, in reality, the expected recession may be much more severe than the Fed supposes. This conclusion was reached by the famous American economist and professor emeritus of New York University Nouriel Roubini. Note that earlier the scientist was one of the first to predict the global financial crisis of 2008.

The economist stressed that today the Fed faces a dilemma. On the one hand, the regulator needs to continue to fight inflation, which is still several times higher than the target level. On the other hand, a further increase in interest rates to curb prices runs the risk of hitting the economy.

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