How Bitcoin Can Thrive in the Face of Turbulent Markets

Learn how Bitcoin can thrive in the face of turbulent markets and the loss of value in U.S. Treasurys. Explore the impact of rising interest rates and financial instability on fixed-income investments.

Posted 7 months ago in Bitcoin


Bitcoin price chart showing growth during turbulent markets

The losses on U.S. Treasurys recently surpassed $1.5 trillion, and the likely outcome is turbulent markets, but how will Bitcoin price fare?

This has led investors to question whether Bitcoin (BTC) and risk-on assets, including the stock market, will succumb to heightened interest rates and a monetary policy aimed at cooling economic growth. As the U.S. Treasury keeps flooding the market with debt, there’s a real risk that rates could climb even higher, exacerbating the losses to fixed-income investors. An additional $8 trillion in government debt is expected to mature in the next 12 months, further contributing to financial instability.

As Daniel Porto, the head of Deaglo London, pointed out in remarks to Reuters: Porto's comments resonate with a growing concern in financial circles — a fear that the central bank might tighten its policies to the point where it causes severe disruptions to the financial system.

One of the primary drivers behind the recent turmoil in financial markets is the rise in interest rates. As rates increase, the prices of existing bonds fall, a phenomenon known as interest rate risk or duration. This risk isn’t limited to specific groups — it affects countries, banks, companies, individuals and anyone holding fixed-income instruments. The Dow Jones Industrial Index has experienced a 6.6% drop in September alone. Additionally, the yield on the U.S. 10-year bonds climbed to 4.7% on Sept. 28, marking its highest level since August 2007.

This surge in yields demonstrates that investors are becoming increasingly hesitant to take the risk of holding long-term bonds, even those issued by the government itself. Banks, which typically borrow short-term instruments and lend for the long term, are especially vulnerable in this environment. They rely on deposits and often hold Treasurys as reserve assets. When Treasurys lose value, banks may find themselves short of the necessary funds to meet withdrawal requests. This compels them to sell Treasurys and other assets, pushing them dangerously close to insolvency and requiring rescue by institutions like the Federal Deposit Insurance Corporation or larger banks.

The collapse of Silicon Valley Bank, First Republic Bank and Signature Bank serves as a warning of the financial system instability. While emergency mechanisms such as the Federal Reserve's emergency loan Bank Term Funding Program can provide some relief by allowing banks to post impaired Treasurys as collateral, these measures do not make the losses magically disappear. Banks are increasingly offloading their holdings to private credit and hedge funds, flooding these sectors with rate-sensitive assets. This trend is poised to worsen if the debt ceiling is increased to avoid a government shutdown, further raising yields and amplifying losses in the fixed-income markets.

As long as interest rates remain high, the risk of financial instability grows, prompting the Federal Reserve to support the financial system using emergency credit lines. That is highly beneficial for scarce assets like Bitcoin, given the increasing inflation and the worsening profile of the Federal Reserve's balance sheet as measured by the $1.5 trillion paper losses in U.S Treasurys. Timing this event is almost impossible, let alone what would happen if larger banks consolidate the financial system or if the Federal Reserve effectively guarantees liquidity for troubled financial institutions.

Still, there’s hardly a scenario where one would be pessimistic with Bitcoin under those circumstances.

Last updated 9/29/2023, 10:46:09 PM

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