Why a Global Financial Crisis Still Won't Validate Bitcoin as a Currency

The recent collapse of Silicon Valley Bank (SVB) has had a ripple effect on the financial industry, leading to increased volatility in bank stocks and exposing underlying structural pressures. In addition, the failure has sparked debate about the relaxation of regulations during the Trump era, mismanagement of risk, and sudden increases in interest rates. However, the exact cause of the collapse remains uncertain. The unexpected effects of SVB's collapse include Bitcoin trading above the $28,000 resistance level for the first time since June 2022, with some suggesting it could find a place in the hearts of serious investors again.  

In this article, we will discuss how the crypto decorrelation is giving DeFi advocates a new soapbox to shout from, but also why that optimism might be naïve and probably premature. Traders are reminded that regardless of your stance on crypto, trading is a high-risk activity and should not be conducted without extensive due diligence.  

DeFi Defenders  

Even with renewed vigour, Bitcoin has fallen on somewhat tough times lately. Since the soaring highs of over $65,000 in November, even with some recent resurgence, the predominantly unregulated market has still seen over half its value dissipate. Even so, it seems that small gains speak louder than large losses - with crypto advocates becoming vocal about their optimism for the space once again.  

Ilan Solot, co-head of digital assets at Marex, believes that Bitcoin is correlated with liquidity conditions and real rates, both of which have been favourable for the crypto market recently. The potential for further easing by central banks and financial institutions receiving life rafts and bailouts has added to the upwards momentum in crypto prices. Yat Siu, co-founder and chairman of Animoca Brands, suggests that cryptocurrencies could serve as a "safety net" investment during turbulent times faced by the traditional financial industry, which is reinforced by the recent recovery in altcoins like Ethereum and Binance Coin. As a result, cryptocurrencies could gain more attention from investors seeking diversification and safety in their portfolios.  

Why Bitcoin Won't Be Validated as a Currency:  

Bitcoin is a Poor Means of Exchange  

While some believe that a financial crisis could validate cryptocurrencies like Bitcoin, it's important to recognize that Bitcoin's extreme volatility makes it a poor medium of exchange. Bitcoin's design as a peer-to-peer cash system is intended to function as a currency with stability equivalent to that of FIAT currencies backed by a government, but its volatility is almost ten times higher than that of major exchange rates. This volatility can cause significant issues for those exchanging Bitcoin for goods or services, as the value of the currency can vary significantly between purchase and exchange.  

Additionally, because cryptocurrencies lack government backing, they are more vulnerable to market fluctuations and manipulations. Until cryptocurrencies can address these issues and provide the same level of stability and ease of use as FIAT currencies, they will likely continue to be speculative assets rather than widely adopted currencies.  

Bitcoin May Not Even be a Good Store of Value  

Bitcoin's extreme volatility also poses challenges when it comes to using it as a reliable store of value. While it has been a popular investment choice due to its significant historical gains, its value is vulnerable to sudden and significant losses. Multiple price crashes in the past, such as in 2018, which saw its value fall by more than 80%, have highlighted the challenges of using Bitcoin as a store of value.  

Bitcoin's lack of backing from a government or centralized authority means that its value is determined solely by market demand. While this can provide traders with significant gains, it also makes the currency vulnerable to sudden shifts in investor sentiment. If confidence in Bitcoin were to wane, it could lead to a dramatic decline in its value, making it a risky option for those seeking a stable store of value. The high volatility of cryptocurrency also makes it difficult for someone to completely shift to Bitcoin as their primary currency as they are in constant jeopardy of losing vast sums of their savings, a risk that is much less prevalent in a centralized currency such as USD.  

We Are Too Reliant on Traditional Currency  

Reinforced by research conducted by Yale School of Management’s Program on Financial Stability, even stablecoins, let alone highly volatile cryptocurrencies do not have sufficient stability to be used as a dominant currency – at least not yet. The prospect of Bitcoin being validated as a currency during a global financial crisis is highly unlikely due to traditional currency's deeply ingrained position in our current financial systems. Bitcoin's decentralization and lack of stability make it more vulnerable to market volatility and less secure in times of crisis. Additionally, Bitcoin's ability to receive the same level of bailouts as traditional currencies are questionable, given the decentralized nature of cryptocurrencies.  

While the appeal of a decentralized currency is attractive, the current financial system is too reliant on traditional currencies to make a sudden shift to Bitcoin in the event of a global financial crisis. The Corporate Finance Institute says, “The most important feature of fiat money is the stability of its value.”

Bitcoin's lack of stability and decentralization make it an unlikely candidate for serving as a primary currency. Although it may continue to serve as a speculative investment, it is unlikely to replace traditional currencies as a reliable means of exchange and store of value anytime soon. The future of cryptocurrencies remains uncertain, and it remains to be seen if they can overcome their limitations and become mainstream currencies.

Conclusion

In conclusion, while the recent collapse of Silicon Valley Bank has led to renewed optimism among cryptocurrency advocates, it is unlikely that a global financial crisis would validate Bitcoin as a currency. Despite the potential for cryptocurrencies to serve as a "safety net" investment, their extreme volatility and lack of stability make them a poor medium of exchange and unreliable store of value. Additionally, a number of sources cite that the current financial system is simply too reliant on traditional currencies to make a sudden shift to Bitcoin in times of crisis; although there is always the question vested interest when citing financial institutions on this matter. While the future of cryptocurrencies remains uncertain, it is unlikely that they will replace traditional currencies as a reliable means of exchange and store of value anytime soon.

* Note, trading Cryptocurrency CFDs and spread bets is restricted in the UK for all retail clients.