Banks come and go, but Bitcoin is forever
From Bear Stearns and Lehman Brothers in 2008 to Silvergate, Silicon Valley Bank, Signature Bank and Credit Suisse in 2023 — whilst history keeps repeating itself in tradfi, Bitcoin has firmly cemented its place as the ultimate decentralised store of value
- As the market digested the bailout of Silicon Valley Bank depositors last week (and thereby indirectly bailing out USDC), focus quickly shifted to Credit Suisse as contagion spread to Europe
- Credit Default Swaps on CS skyrocketed while share price tanked, before the Swiss National Bank stepped in with a SFR 50 billion loan and an assurance to provide more liquidity if necessary (Credit Suisse borrows more than $50 billion from Swiss National Bank)
- It was clearly insufficient to calm fears for the 167-year-old bank which saw outflows in excess of $100 billion in Q4 of last year
- UBS was eventually “persuaded” by the Swiss government to acquire Credit Suisse over the weekend for SFR 3 billion, in a controversial deal which also wiped out holders of AT1 bonds (UBS-Credit Suisse deal puts Switzerland’s reputation on the line)
- Meanwhile back in the U.S., despite the earlier-announced BTFP, First Republic Bank’s share price continued its freefall on concerns over its high proportion of deposits not covered by FDIC insurance (First Republic Bank woes mount despite Wall Street rescue)
- It was later reported that US officials are studying ways to guarantee ALL bank deposits should the crisis worsen
- Last week, we pondered if the banking crisis in the U.S. and the subsequent Fed response could be the catalyst of a new bull market for Bitcoin (Equifinality)
- If there was any hesitation, they had been quashed by the events of the past week. While we had been cautiously optimistic and gradually accumulated exposure throughout most of 2023, we now expect the price of Bitcoin to be significantly higher than current spot by year end, despite of the fact that we have already seen a 40% rally in under 2 weeks (and keeping in mind we are still around 60% down from ATHs)
- What about the FOMC meeting tonight? Regardless of the outcome of the Fed meeting, we believe that Bitcoin shall continue on its march towards ATHs (not necessarily in a straight line, you know what I mean)
- Just to be clear, we don’t believe that the world is on the verge of a fully-fledged global banking crisis, as the measures taken by centrals banks are likely to have averted a disaster of catastrophic proportions. The substantial drop in yields has also alleviated some of the mark-to-market losses on bank balance sheets
- The surfacing of the unintended consequences of rapid-fire Fed interest hikes will tie the hands of Chair Powell, therefore bringing forth the bull market for Bitcoin sooner than anticipated
Scenario 1 — Fed sticks to 25bp rate hike (86% priced in by Fed funds futures)
- Chair Powell could treat the issue of bank liquidity separately from the issue of inflation, and consider the banking situation well-contained via the measures already announced, while the current level of inflation would still warrant a 25-bp rate hike
- His commentary is likely to be more dovish, paving the way for a pause in the May/June meeting, supported by incoming falling CPI data (March CPI tracking towards the low 5’s after a reading of 6% in Feb), and potential rate cuts in the second half of 2023
Scenario 2 — Fed cites increased risks in the banking sector and keeps rates on hold
- This is likely to spook the markets as it signals “panic” from the Fed on the bank liquidity situation
- Both scenarios lead to towards a Fed pivot and subsequent monetary easing
- In the event that there is further contagion in the banking sector, it inevitably leads to more central bank bailouts (a.k.a. the money printer)
- All paths leading to a higher Bitcoin price…
Trade Idea 1 — BTC Accumulator
Ideal for clients looking accumulate Bitcoin at a discount to the prevailing market price:
Sample terms:
Current Spot: $28,200
Strike Price: $25,200
Knock Out: $30,300
Tenor: 56 days
Notional: 1 BTC per day ($1,411,200)
The client buys 1 BTC per day at a fixed price of $25,200 (10.6% discount to the current price), as long as the price stays below $30,300 (observed at 4pm Hong Kong time daily)
In the above illustration, the trade terminates after the client had been able to accumulate 15 BTC @ $25,200, and is thus sitting on a paper profit of $76,500 vs the knock-out level of $30,300.
Trade Idea 2 — BTC Call Spread
Expiry: 30-June-2023
Structure: $30,000/$40,000 Call Spread
Premium: $2,150 per option
For illustration purpose, assuming 20 BTC notional:
Max profit of $157,000 if BTC settles ≥ $40,000 on 30-Jun
Max loss of $43,000 if BTC settles ≤ $30,000 on 30-Jun
Payoff Ratio: 3.65:1
Contact the desk for live quotes on these and other trade ideas
