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Bitcoin coins are seen in this file photo. Trading volumes at China’s three largest bitcoin exchanges have plummeted after the central bank put the virtual currency market under sharper scrutiny a month ago.© Benoit Tessier / Reuters/Reuters

Jacob Silverman is a journalist in New York. He is the author of two books and the host of the new CBC podcast on the fall of cryptocurrency exchange FTX, The Naked Emperor.

As a slow-motion banking crisis rippled through markets in recent weeks, something strange happened: Crypto prices rallied, with Bitcoin rising from a low of about US$20,000 to about US$28,700 in a week. Other tokens followed. By recent market standards, this is practically a bull run, and the crypto industry responded accordingly, pronouncing crypto a safe haven amidst wider financial turmoil. Here was one of those much sought-after use cases – while regular banks suffer, crypto only grows.

As appealing as this narrative – and the short-term price surge – may be for crypto bros, it doesn’t hold up well to scrutiny. Crypto prices are notoriously volatile and prone to market manipulation, so while an immediate uptick may seem to augur well when mainstream finance is on the fritz, it’s hard to extrapolate some larger truth here. A fleeting burst of market enthusiasm can’t mask the existential issues facing a battered crypto industry entering a wider environment of economic uncertainty.

Deciphering a crypto price rally can feel about as reliable as astrology, but we can point to some possible factors. Tether, the industry’s most popular stablecoin, minted US$5-billion worth of USDT tokens during the same week Bitcoin rallied. Large mintings of Tether have, in the past, been linked to Bitcoin price movements.

To be sure, crypto proponents argue that such large mintings are not made out of thin air but simply reflect lots of people buying Tether in order to buy Bitcoin. But the company behind Tether, like many in crypto, has consistently refused to fully reveal its books or offer meaningful proof that the stablecoin is indeed backed one-to-one by dollars.

Meanwhile, another stablecoin, USTD, saw its market cap rise about US$1-billion. Binance, the largest crypto exchange in the world, announced that it was converting about US$1-billion of its BUSD stablecoin to “native crypto,” meaning Bitcoin, Ethereum and possibly other tokens.

The point is that the recent surge in Bitcoin prices can be traced to the fact that some big players were moving a lot of crypto – and quite publicly, too.

Zooming out, it’s hard not to see an embattled future for consumer crypto. FTX’s November collapse might have been the most significant event last year, but its downfall was preceded by a number of other companies failing. Lawsuits and indictments are blooming like spring flowers. We’re a long way from the US$69,000 high of Bitcoin in November, 2021, or the peak retail consumer trading volumes of May, 2021. The industry’s reputational headwinds have only increased with the indictment of Sam Bankman-Fried, the putative face of crypto, on 12 felony charges.

With the closure of Silvergate Bank and Signature Bank, crypto’s fiat onramps and offramps are closing, too. Like any industry, crypto companies need access to the mainstream banking system and to real dollars. If U.S. banks won’t take their money, as increasingly seems the case, then they’ll start taking it overseas. Coinbase, a publicly traded, regulated U.S. exchange, has discussed expanding abroad. It’s been losing hundreds of millions of dollars per quarter in the U.S. Most reporting indicates crypto companies will start parking their funds in the Caribbean or favourable European jurisdictions.

Crypto partisans have accused the Biden administration of essentially declaring war on crypto. The closure of Signature Bank has been cited as premature – a supposedly healthy bank closed because it grew too close to a now toxic industry. Signature’s problems appeared to extend well beyond working with beleaguered crypto companies. But the initial point isn’t necessarily wrong. The Federal Reserve, conscious of risk, has been issuing rules around digital assets that have the effect of discouraging mainstream banking from working with these companies. President Joe Biden’s executive orders have centred on “responsible development of digital assets,” often with a focus on consumer protection. This week, the White House released a sweeping economic report that included a section examining digital assets. Its conclusion: “Crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient.”

Whether the crypto industry and investors agree with this conclusion, it’s one they’ll have to contend with, both politically and in the public consciousness. The everyday retail customers I talk to – people who put down US$500 or maybe US$5,000 on crypto – tend to be disillusioned. They no longer buy the hype or the promise of future rewards. If they didn’t lose their money, many of them can’t even access what is supposedly theirs – it’s stuck on FTX or Celsius or BlockFi. Bankruptcy processes may take years to play out, leaving people with just a portion of their initial investment.

In the meantime, as crypto experiences a brief stablecoin-driven boom, big-time investors can smile as their balances rise, but they are potentially part of a shrinking market.