Pandemic cash creation lifted markets, now small banks and crypto are in limbo | Opinion
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The COVID-19 pandemic caused governments and central banks to create a lot of new money, which had a significant impact on the banking industry, asset prices, and the cryptocurrency market.
The COVID-19 pandemic that hit the world in 2020 led to governments worldwide implementing huge stimulus packages worth trillions of dollars to keep businesses afloat and people out of bankruptcy.
However, the financial sector has been impacted in unforeseen ways due to the influx of this money.
Fresh cash to support the economy
Banks are a critical part of the financial system, and their role in the economy is well-established. However, the massive injection of cash into the economy has created challenges for banks, which lend money and generate income from interest on loans.
The past low-interest rate environment made it difficult for banks to maintain profitability, and the inflationary pressures caused by the influx of cash make it harder for them to lend money without taking on more risks.
Now with interest rates up again and fewer people spending, some banks are failing while others are struggling to stay afloat.
Banks are experiencing challenges, investors are seeking alternative investment opportunities, and things are changing. One such alternative investment opportunity is cryptocurrencies. The pandemic has expedited the adoption of digital currencies as people opt for alternative assets to avoid fiat currency.
The increased demand for cryptocurrencies has led to a surge in their prices, with bitcoin recording an all-time high of over $69,000 in November 2021. However, this upward trend popped in 2022, and 2023 is looking very unsure for the crypto sector.
Furthermore, the influx of cash into the economy has also impacted asset prices. Investors are pouring money into stocks, real estate, and other assets looking for alternative investment opportunities. This has led to a great increase in asset prices, with some reaching record highs.
The pandemic has greatly increased the shift towards digital currencies and blockchain transactions, which is expected to continue. Banks are unlikely to recover anytime soon from the challenges they face, and they will need to adapt to the new economic landscape before any more are lost like SVB and Signature Bank.
The impact now
The U.S. bureau of labor statistics (BLS) released data showing the U.S. Consumer Price Index (CPI) has increased by 6% over the past year and 0.4% in February. The news sent shockwaves throughout the financial sector, but an asset class that appears to be benefitting from this news is bitcoin and the cryptocurrency market.
Bitcoin has been on an upward trajectory in recent months and broke the $26,000 price level earlier today. This price surge is due, in large part, to the recent inflation data, as well as the collapse of Silicon Valley Bank and Silvergate Bank this past weekend.
Many investors see bitcoin as a safe haven asset in times of economic uncertainty, since it has a limited supply and cannot be manipulated by governments or central banks.
Bitcoin’s value is not tied to any particular currency or economy, which makes it an attractive and intriguing investment option in times of inflation and market volatility.
Inflation breaks down the value of traditional currencies like the U.S. dollar, which ultimately leads to investors seeking out alternative assets to protect their wealth. This is where bitcoin comes in since it is viewed as a hedge against inflation due to its finite supply of 21 million coins.
Bitcoin’s price has historically increased during periods of high inflation, as investors seek out assets that can hold their value during times of economic uncertainty. With U.S. banks failing and the inflation rate reaching its highest point in decades, it is no surprise that bitcoin’s price is on the rise.