What a weekend. For those not sure of all that is going on, let's get you up to speed: The most significant bank failure since the Great Recession occurred on Friday when Silicon Valley Bank (SIVB.Q), the nation's 18th largest bank, went belly up.
The beginning of the meltdown occurred early last week when Silicon Valley Bank said it had sold a portion of its portfolio primarily consisting of U.S. Treasuries or government bonds at a loss. Because the Federal Reserve has been raising interest rates in an effort to control inflation, Silicon Valley Bank's portfolio ended up underwater.
Once the announcement was made, a bank run ensued as depositors scrambled to withdraw their funds as confidence in the bank dwindled. In total, a whopping $42 billion was withdrawn on just Thursday alone, making it the largest bank run in U.S. history.
A glimmer of hope
While the markets were in scramble mode Monday trying to comprehend what took place over the weekend and whether there would be any other casualties, there was one bright spot -- Bitcoin (BTC 0.47%). Largely brushing off the hysteria in the stock market, Bitcoin climbed more than 15% at one point.
There are likely a handful of reasons Bitcoin jumped in light of the Silicon Valley news, but one of the most prominent might be related to renewed confidence in Bitcoin's allure as an alternative to the U.S. fractional reserve banking system.
That's a lot to unpack. But beginning to understand how banks operate is step one to grasping why Bitcoin is becoming a more attractive substitute to the status quo.
For similar reasons that led to the demise and bankruptcy of the now infamous crypto exchange FTX, banks only keep a fraction of deposited money in their reserves and then use the rest to engage in other speculative activities, such as making loans. Although the banking industry is heavily regulated and backed by the federal government, they aren't immune from making poor decisions.
To combat this reality, Bitcoin was created in 2009 to give people another means to store value that didn't rely on opaque and at times unsound banking practices (look no further than the Lehman Brothers fiasco in 2008).
With Bitcoin, a new financial world emerges -- one that is the antithesis of the modern banking system as it offers users a transparent, failure-resistant, decentralized, highly secure network that isn't dependent on any one human or agency to keep it running. This isn't to say that Bitcoin marks the end of the banking industry, but as more events like Silicon Valley Bank's demise occur it sheds more light on the fact that banks aren't immune to risk and alternative options are available.
The beginning of a new rally?
The fallout of Silicon Valley Bank is remarkably eerie when considering that almost 10 years ago to the day a similar scenario unfolded and Bitcoin soared. In March 2013 banks in the country of Cyprus underwent their own crisis and subsequently had to be bailed out by the E.U. As more people became aware of the reality surrounding banks, Bitcoin boomed and notched its largest-ever rally in price. In just a month Bitcoin surged from $45 to $230, a 400% increase.
Although the scale of the Cyprus catastrophe was more drastic, the similarities between the two situations remains palpable. Whether Bitcoin follows the same path as a decade ago remains unknown, but of more importance is the long-term potential the world's first cryptocurrency possesses as more people come to the realization that their money might actually be safer in Bitcoin than your average bank.
