The reasons why Bitcoin is rising

One of the most significant shifts over the past few weeks in sentiment has been around the banking system. The collapse of Silicon Valley Bank and Credit Suisse shortly after was contained relatively quickly.

But the damage is far from over. Central banks and regulators were quick to contain the fallout, but a few weeks after the initial storm, there are still repercussions reverberating.

Everyone is waiting for the next crack. It’s the calm before the next storm.

The March banking collapses (which we have written about extensively) were the start of a big u turn in Bitcoin, gold and now residential real estate markets. They were also the peak points in interest rates, with medium to long term bond yields collapsing ever since. Here is how I explained the situation back in early March.

Following the collapses, banks started tapping into liquidity from the Federal Reserve at huge ranges starting from around US$150bn per week and falling to around US$140bn last week. Despite the decline, these facilities and injection of liquidity are significant. There’s a lot of money being pumped back into the financial system to ensure liquidity doesn’t dry up.

The problem with these facilities though is that they can create a vicious cycle. We’ll leave that issue for another day, it’s mostly a banking problem.

Back to Bitcoin, gold and real estate. I like to think of the three together because even though they are very different assets, they tend to move based on the same underlying driving forces. One could argue that a lot of the money that would have otherwise flowed into gold, has instead flowed into Bitcoin over the past 10 years.

These “currency” type of assets (counter USD) are basically just bets on where fiat money is going and rise in response to more or less money being printed.

The banking issues to me have signalled a peak in this interest rate cycle. Even though inflation isn’t back down to 2-3%, where most central banks need it to be, they have realised that 4-5% cash rates are a peak. It will be very difficult to hold everything together if they push harder above this range.

We called a top in the RBA’s cash rate a few weeks ago and it’s interesting to now see major banking economists like the Commonwealth Bank calling for two rate cuts in the cash rate by the end of 2024.

Bitcoin and gold as speculative assets will continue to move in response to liquidity as banks race an up hill battle in coming months. My preference is always for residential real estate, even for speculative purposes. If you get residential real estate wrong, at least you have a nice cash yield to bail you out.

With gold and Bitcoin, there is no income and very difficult to find intrinsic value. But that doesn’t mean they can’t continue to keep rising in the event of more bank problems, which I think are likely.

Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.