Crypto soars as bank bailouts remove haircut risk, encourage rate hopes

© Reuters

By Geoffrey Smith 

Investing.com -- Cryptocurrencies soared on Monday after federal action to bail out one of the biggest regulated banks providing services to the sector removed a major immediate threat to it.

The U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corporation said on Sunday that they would backstop the deposits of both Silicon Valley Bank (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY), two institutions that provide essential banking services to some of the crypto space's biggest players. 

The announcement removed the risk that billions of dollars held by the likes of Coinbase (NASDAQ:COIN) and USD Coin issuer Circle could be lost as part of the authorities' rescue plans for the banks. 

The crypto universe is ill-placed to absorb any more shocks of that kind, still reeling from the implosion of FTX late last year. Allegations of fraud at FTX have led to increased scrutiny of the crypto space, particularly with regard to its interactions with the regulated banking sector and to the risk that bad governance in crypto could infect Main Street financial institutions. 

One of the biggest gainers on Monday was the stablecoin USD Coin, issued by Circle. Circle has $3.3 billion of its reserves on deposit at Silicon Valley Bank, a sum that far exceeds the federally-guaranteed maximum. The risk of it taking a "haircut" on its deposits as part of SVB's resolution drove USD Coin down as far as 88c on Saturday, but the coin, which is designed to trade at $1 exactly, had recovered to 98.61c by 04:45 ET (09:45 GMT).  Another big beneficiary was the stablecoin DAI, which holds most of its reserves in USD Coin. It rose to 98.41. 

More mainstream digital assets benefited not only from the implications of federal action for the security of reserve assets, but also from the impact of the weekend's events on the outlook for interest rates. 

Several banks, including Goldman Sachs, now assume that the Fed will proceed more gently with any further moves to tighten monetary policy, fearful of doing further damage to the banking system. 

Short-term U.S. interest rate futures rose sharply on Monday morning in Europe, as investors slashed their bets on a rate hike. By 04:45 ET, the market indicated that the most likely outcome of the Fed meeting next week is now no change to the Fed Funds rate. Previously, the consensus had been for a 25 basis points hike, with a sizeable minority betting on a half-point hike after a string of stronger-than-expected economic data since the start of the year. 

Bitcoin was up 8.1% at $22,039, while Ethereum was up 8.0% at $1,575.