The developing crisis has resulted in a huge reduction in commodity prices, with some falling by as much as 70-80%. This drop is projected to have an ongoing impact on retail prices, particularly the recent discounting trend seen in companies such as Tesla.
Companies' innovation is also contributing to deflation, as the cost of invention is falling due to the learning curve. The yield curve has also inverted by more than 100 basis points, signalling a deflationary signal as well as banking sector concerns.
Initially, regulators attempted to blame cryptocurrency for the problem rather than rising interest rates and deposit outflows, but they now view it as a viable solution. Florida Governor Ron DeSantis has revealed plans to allow the state to regulate enterprises dealing with cryptocurrency, which might set it apart from other states.
Bitcoin's performance during the recent crisis demonstrated its utility as a safe haven asset. Its decentralised and transparent structure tackles many of the challenges that traditional banking systems have, and its lack of a single point of failure makes it a dependable option during times of liquidity scarcity.
Bitcoin's price behaviour during the crisis differed from that of equity markets, providing useful insights. The conservative Big Ideas 2023 report contains price targets, which have been altered due to regulators moving corporate treasuries away from Bitcoin.
Nonetheless, the conduct of Bitcoin during the crisis is likely to draw more institutional investors, and a suggested allocation for their portfolios is between 2.5 and 6.5 percent, similar to previous allocations to new asset classes such as real estate and small cap stocks.
The actions adopted by banks to resolve the liquidity issue, do not adequately address the solvency issue. There have been historical firsts, such as the 19-fold increase in interest rates in less than a year, which has never happened before, not even during Volcker's tenure.
Furthermore, there has been a considerable outflow of deposits, with some going to Venture Capital, which is experiencing a funding drought, and others being drawn in by higher-paying money market funds. This combination has been disastrous for banks.
The backstop in place means that banks will pay approximately 4.37% if they rely on the facility, which is higher than what many banks have been paying for deposits. Silicon Valley Bank, for example, had an average Health term Security of only 1.6%, so they would now experience net interest losses that will reduce revenues rather than a significant market hit equity.
To summarise, the current crisis has resulted in a large decline in commodity prices, which is projected to continue to have an influence on retail pricing. Yet, company innovation, paired with authorities' acceptance of cryptocurrencies as a legitimate alternative, may provide some respite. Bitcoin has emerged as a safe haven asset, revealing important insights on market behaviour throughout the crisis. While banks have made efforts to address liquidity challenges, questions about solvency remain. Because of the backstop, banks will be charged a higher interest rate for relying on the facility. As we navigate these turbulent waters, it is critical to be watchful and investigate alternate options, such as cryptocurrencies, as a potential source of stability.
Source:
Wealthy Value, 26 March 2023, "Nobody is Understanding THIS, I Don't Know Why" | Cathie Wood's Crazy Bitcoin Prediction",