Bitcoin price falls sharply, can a new banking crisis save the day?

In 2023, this caused a huge rise for Bitcoin, as many investors suddenly understood that their capital is not so safe with the banks.

The interesting thing about Bitcoin is that there is no such thing counterparty risk. The digital currency is an asset that is not dependent on third parties for its existence. You can keep it completely under your own management, so you are in fact the bank yourself.

Are we now getting a second episode of the banking crisis in the United States and can that give the Bitcoin price another huge boost? After the price falls over the past 24 hours, it does not seem that way, but it is still too early to draw definitive conclusions.

Should the US central bank intervene?

It only becomes interesting when the US central bank has to intervene. At this point, there is no sign of a second banking crisis, because the failure of Republic First Bank poses no threat to the rest of the industry, let alone the financial system.

In the background, however, the reserves that commercial banks hold with the US central bank are starting to reach a critical point. Currently, reserves are only $360 billion above the “buffer” that is so important to the US central bank.

As that limit approaches, the greater the chance that the US central bank will intervene. At the moment, the central bank still chooses to shrink its balance sheet.

In doing so, they in effect allow government bonds and other financial assets to drain from their balance sheet. But the development of this situation could mean that they drastically slow down the balance sheet shrinking (good for Bitcoin) or even completely reverse it.

In a crisis situation, they may have to decide to buy assets from the market, to support commercial banks and prevent the financial system from collapsing.

The timing of this is dramatic for the US central bank, because inflation is rising.

But when push comes to shove and they have to choose between bailing out the banking sector (and by extension the financial system) or inflation, they always choose bailing out the banks.

Therefore, we may see an interesting reaction from the US central bank in the relatively short term, which could turn out to be very bullish for Bitcoin.

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