Bitcoin prices have skyrocketed this year, surging nearly 70 percent in 2023 year-to-date to cross over $27,800. The cryptocurrency surged 20 percent in March so far on the back of the banking crisis in US and European banks and concerns regarding its impact on the rest of the banking sector.
"The narrative has quickly turned to: weaker traditional banking sector = higher bitcoin price. This is just a narrative that has been self-reinforced by price action. In fact, as we have highlighted earlier, bitcoin trades as a speculative asset driven by the prospect and availability of fiat currency and resulting crypto liquidity," said global brokerage Morgan Stanley in a recent note. Now the market focus is on whether the US Fed will need to inject more liquidity into banks and how this impacts the path for monetary policy, it added.
The index has risen 20 percent in March so far after a flat February and a 40 percent rise in January 2023.
The brokerage also noted that while the expectations of US dollar liquidity to support banks have helped bitcoin rally nearly 70 percent in 2023 YTD, other factors are at play too.
One such important point the brokerage report highlighted was that crypto-exchange Binance dominates bitcoin trading on exchanges. Binance is the largest crypto exchange by trading volume and based on the data it provides, its dominance in bitcoin trading has reached an extreme high in recent months, it said.
"Binance cut Bitcoin trading fees to zero in July last year and has continuously been gaining market share. 81 percent of BTC traded on exchanges in February was traded on only one exchange, Binance," it revealed.
MS concluded that traders on Binance now set the daily price for the cryptocurrency.
"Investors mostly ask us about Coinbase as that is the largest listed crypto stock, but we would argue that the flows on Binance should be more closely monitored to understand what is going on in the markets. For context, after bitcoin rallied 40 percent in January, the volume of BTC/USDT traded on Binance reached 38x that of the equivalent pair on Coinbase relative to being only 4x in early 2022," it observed.
It is possible that some traders that were using FTX have now moved to using Binance instead and contributing to the rise of the market share, believes MS.
It further explained that the dominance of Binance cannot only be explained by the lowering of trading fees.
"US-based traders don't have access to the Binance exchange, meaning it is global participants such as in Asia, the Middle East and Europe that are likely boosting their trading activity on Binance. Traders around the world may view Binance as a place to trade that is not directly affected by the changing and more limiting US regulation," it explained.
The brokerage further noted that since the start of 2023, US regulators have been telling banks to reduce exposure to the crypto industry. Many "on-ramps" between the fiat USD banking system and the crypto ecosystem have been closed.
On January 22nd, Binance informed customers that Signature, its fiat banking partner, would limit transactions to over $100k from Feb 1st. In the following week, bitcoin traded in a relatively narrow range of around $22-24.5k. Binance BTC/USD trading volumes remained steady while Coinbase and broader market volumes declined. This pattern of activity supports the conclusion that the Binance exchange activity has become even more important for the daily price setting of bitcoin, indicated the brokerage.
It is likely that traders have been exchanging USD stablecoin exposure for bitcoin due to the recent limitations imposed by regulators on crypto companies and products, MS predicts.
It also informed that the initial rally of bitcoin above $18k in early January was driven by the liquidation of short futures positions as traders didn't accumulate bitcoin holdings on exchanges. Binance accounts for roughly half of the holdings, it revealed.
In an earlier report, Morgan Stanley stated that the Silicon Valley Bank crisis could be bitcoin’s time to shine.
“Bitcoin was created as a way for anyone to hold value in a private digital wallet without needing an intermediary bank to hold the value for them or to facilitate transactions,” it said.
However, it cautioned that the price showed that bitcoin isn’t isolated from the traditional banking system. “Our conclusion is that the Bitcoin network can operate without banks but that bitcoin's price, and thus its purchasing power, has been and continues to be influenced by fiat central bank policy and needs banks to facilitate flows into crypto,” it noted.
It also pointed out that the ongoing rally in bitcoin is likely a result of a “short squeeze rather than a fundamental shift in the trading dynamic.”