US Bank Failures Fuel Crypto Adoption

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Cryptocurrency adoption in the United States has surged amid fears of a full-scale banking crisis, according to a new survey. According to Morning Consult, 22% of Americans, more than one in five, said they owned at least one form of crypto in April, which is a four percentage point increase from January.

Unsurprisingly, Bitcoin was the most widely held digital asset in April, with 16% of respondents reporting owning some of it. That’s up 13% a year earlier. Ethereum was the number two asset, with 12% ownership in April 2023, followed by Binance Coin and Tether at 8% each.

I must point out, however, that many people would be against Bitcoin being called a crypto; even Securities and Exchange Commission (SEC) Chairman Gary Gensler and Commodity Futures Trading Commission (CFTC) Chief Rostin Behnam have both described the world’s largest digital asset as a commodity.

Traditional finance under pressure

Again, the rise in crypto ownership was likely related to ongoing market jitters involving the banking industry, particularly the bankruptcies of Silicon Valley Bank (SVB), Signature Bank, and more recently, First Republic Bank.

San Francisco-based First Republic became the third U.S. bank to fail this year, making it the second-largest bank in U.S. history to do so. JPMorgan, the nation’s largest bank with more than $2.6 trillion in assets, became even bigger last weekend when it bought First Republic at auction from the Federal Deposit Insurance Corporation (FDIC). .

Digital assets, which many investors believe could one day replace traditional financial products and services, surged last week. The Bloomberg Galaxy Crypto Index gained 4.69%, while Bitcoin rose 7.64%.

Seek exposure to Bitcoin and gold producers

According to the Morning Consult poll, more than a quarter of Americans (27%) said they plan to increase their bitcoin holdings next month. Twenty-one percent said the same about Ethereum.

But cryptos weren’t the only assets sought after by investors as banks looked increasingly insecure. Gold producers also benefited.

The graph below compares the evolution of the market value of three asset classes in billions of dollars since the beginning of the year. SVB, Signature, Credit Suisse and First Republic together lost $50 billion. Meanwhile, gold miners, as measured by the NYSE Arca Gold Miners Index, gained more than $41 billion in market value, and Bitcoin added nearly $255 billion from $318 billion. dollars at the start of 2023 to $566 billion today.

De-Dollarization Worries Linger and Gold Is Still Underinvested

The steadily declining value of the US Dollar is also supporting Gold and Bitcoin. The greenback rose slightly on Friday, but fell 0.16% for the week.

Investors and analysts continue to sound the alarm over the dedollarization trend, which I wrote about in early April. Stephen Jen, CEO of asset management firm Eurizon SLJ and former chief executive of Morgan Stanley, said the dollar was losing its status as a reserve currency at a pace. According to him, the dollar has lost around 11% of its market share since 2016 and doubled since 2008.

Jen appears to blame US sanctions on Russia for the collapse. The exceptional actions taken by the United States and its allies against Russia surprised major countries with reserves, he wrote in a note last week.

Elon Musk echoed the sentiment, tweeting: If you weaponize the currency enough times, other countries will stop using it.

Meanwhile, billionaire investor Stanley Druckenmiller says shorting the U.S. dollar is his only high-conviction trade right now, adding he’s never seen such uncertainty in global markets in his years. 45 years of investment. In the early 1990s, Druckenmiller who was then working with George Soros bet against the British pound and won over $1 billion.

If what Jen, Musk, and Druckenmiller are saying resonates with you, then gold (and Bitcoin) may make sense.

In light of this, I was surprised to see that gold still represents a relatively small fraction of the $266 trillion investable asset market. According to the World Gold Council (WGC), the global stock of gold bullion, including gold bars, coins and gold ETFs, that investors currently hold is around $3 trillion. This represents approximately 1% of the total amount invested in all financial assets, from stocks and bonds to alternative assets.

I believe it is important to have a well-diversified portfolio, and that includes exposure to gold. I have always recommended a 10% weighting in gold and mining stocks, and with the dollar potentially on an even footing, my conviction has become even stronger.

Originally published May 1, 2023.

The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in gold and silver mining. The Bloomberg Galaxy Crypto Index is designed to measure the performance of the largest USD-traded cryptocurrencies. The US Dollar Index (USDX) indicates the general international value of the USD. To do this, the USDX calculates the average of the exchange rates between the USD and the major world currencies.

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