The unfolding of the banking crisis since March has exposed the weakness of the global financial sector, driving a massive influx of investment toward decentralized finance (DeFi) assets and cryptocurrencies.
But as central banks around the world plan to reverse the aggressively hawkish monetary stance to ease liquidity fears, the popularity of alternative assets could skyrocket further, potentially disrupting the financial market in the near term.
In recent years, the world has witnessed unprecedented growth in cryptocurrencies, leading to a speculative boom and increased adoption. Bitcoin has been adopted as an official currency for some countries, and NFTs saw billions in volume per day at the peak of 2021. In the startups world, several unicorns have been minted like Coinbase Global Inc. And startups like Gameflip have seen traction among retail investors. Gameflip recently launched on StartEngine, which means anyone can invest for a limited time.
Simultaneously, the traditional banking sector has faced numerous challenges, including economic recessions, institution failures and mounting debt. As these two distinct financial domains converge, concerns are mounting about the potential emergence of a black swan event — the combination of a banking crisis and a crypto boom.
Banking Crisis And The Beginning Of A New Crypto Cycle
Three of the five worst banking collapses in U.S. history happened in March. The Federal Reserve's aggressive rate hike policy coupled with poor credit management policies has played a significant role in causing historic bank runs not seen since the Washington Mutual Bank's collapse in 2008.
Billionaire institutional investor Warren Buffett stated that America's banking woes aren't over yet. But the silver lining is that "depositors aren't going to be hurt" as the Federal Deposit Insurance Corp., in tandem with other government agencies, has been taking active steps to repay depositors in full.
The recent crisis has exposed the vulnerabilities of the banking system, resulting in severe bank runs and collapses and subsequent government bailouts. While bailouts have been implemented to mitigate the crisis, the underlying issues remained largely unresolved. The pandemic-induced recession of 2020 and near-zero interest levels resulted in increased debt levels and poor credit management for several institutions worldwide, which are at risk of insolvency.
"If you look at First Republic, you can see that they were offering non-government guaranteed mortgages at fixed rates for jumbo amounts — that's a crazy proposition to the advantage of the bank. It was in plain sight, and we all ignored it until it blew up," Buffett stated yesterday.
Brian Armstrong, CEO of Coinbase, said that "the financial system is major need of an update."
On the positive side, the consensus is that the American banking system is resilient with the structural weaknesses limited to a handful of financial institutions.
Shift Toward DeFi
The fragile state of the financial sector on top of the already crummy global socioeconomic situation has resulted in a shift toward decentralized finance (DeFi) investing. This alternative assets sector suffered a brutal winter in 2022 with Bitcoin, the world's largest cryptocurrency by value, plummeting by over 65% year over year.
But in a surprising twist of events, the cryptocurrency sector is one of the best-performing asset classes so far in 2023. Bitcoin (BTC) is up more than 67% year to date, with Ethereum, the second-largest crypto token by market cap, surged by over 54% in 2023.
Analysts are placing big bets on the crypto sector now, with expectations of Bitcoin crossing $100,000 this year. Balaji Srinivasan, former chief technology officer of the crypto exchange platform Coinbase, bet $1 million that the largest decentralized token would reach $1 million in value in 90 days. But he closed his bet early last week.
Other alternative assets, such as startup investing, are also gaining popularity among investors. For instance, blockchain-powered gaming platform Gameflip recently cleared $160 million in volume on the platform and drawing in 7-figure sums for its community round.
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Potential Debt Ceiling Default And Crypto Black Swan
In addition to the recent banking crisis, the U.S. is approaching its debt ceiling limit. The national debt is around $31 trillion, while the debt ceiling is $31.4 trillion. The U.S. could default on its national debt by as early as June 1 because of lower-than-expected tax collections, which could have catastrophic ramifications on the domestic and global economy.
"That is something that could produce financial chaos," U.S. Treasury Secretary Janet Yellen said in a recent CNBC interview. "It would drastically reduce the amount of spending and would mean that Social Security recipients and veterans and people counting on money from the government that they're owed, contractors — we just would not have enough money to pay the bills."
The debt-ceiling crisis is expected to rejuvenate the crypto sector as investors lose confidence in U.S. dollar. The rejuvenated meme craze has also driven the recent crypto boom. As the macroeconomic issues pile on, the crypto sector could be headed for an unprecedented rally soon, triggering the next black swan event.
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