What happened
Several cryptocurrencies jumped higher today in a move that appears to be linked to ongoing struggles in the banking system, more specifically at First Republic (FRC +0.00%), which recently reported its first-quarter earnings results.
Since late afternoon yesterday, the world's largest cryptocurrency, Bitcoin, traded close to 7% higher as of 10 a.m. ET today and hovered around $29,850. The world's second-largest cryptocurrency, Ethereum, traded 5.4% higher, while the meme token Dogecoin was up 4.6%.
So what
Bitcoin had been struggling in recent days but seems to be benefiting from issues at First Republic after the bank reported first-quarter earnings on Monday that showed it had lost $100 billion of deposits.
The outflows were more than anticipated and leave the bank in a tight position with few good alternatives. There is a chance that other large banks try to find a way to help the bank reduce its balance sheet or acquire the bank, because the failure of First Republic will result in a further hit to the Federal Deposit Insurance Corporation's (FDIC) Deposit Insurance Fund.
Large banks are already facing a big charge to replenish the fund after the collapse of Silicon Valley Bank and Signature Bank, so they don't want to have to pay more for First Republic if possible. This might reportedly involve large banks purchasing some of First Republic's underwater assets at a higher price than they are actually worth, so the bank can get in a better position to shrink its balance sheet.
But even if First Republic is saved, it looks like the bank faces a long road ahead. And Bitcoin and other cryptos have shown a tendency to do well when the banking system struggles because cryptocurrencies were developed as an alternative to the mainstream financial system. Bitcoin and most other cryptocurrencies rallied in March as the banking crisis played out.
In a research note yesterday, Yuya Hasegawa, an analyst at the crypto exchange Bitbank, wrote: "Bitcoin may continue Tuesday's rally in the short term, but it is too early to say it has bottomed out. Its old resistance around $28,800-$29,000 could be a tough ceiling to break until Friday's U.S. PCE [Personal Consumption Expenditures] announcement."
What now
If this recent rally is indeed tied to banking struggles, I don't view it as a long-term catalyst for crypto because I believe First Republic is now more or less a one-off in the banking system.
Bank earnings have mainly shown stability, not that there won't be earnings struggles. Other banks that were being watched carefully, like Western Alliance and PacWest Bancorp, have actually rallied on their earnings reports as well.
I think the macro environment is much more important this year for the trajectory of Bitcoin and the broader crypto market, as Hasegawa wrote. A continuation of slowing inflation followed by a pause on interest rate hikes from the Federal Reserve and a weakening dollar will be more beneficial to cryptocurrencies.
I think a Fed pause is likely sooner than later, and I do continue to like Bitcoin and Ethereum as long-term investments that merit at least some exposure in your portfolio. I also continue to have no interest in Dogecoin.
