Bitcoin and other cryptocurrencies marched higher again on Monday, continuing a recent rally into a new week amid turmoil in financial markets. There are at least five reasons why digital assets outperform — and one is key for stocks.
Bitcoin’s price is up 4% to above $28,300 in the last 24 hours after punctually trading above $28,500 to hit the highest level since the crypto crash accelerated last June. After the largest digital asset stagnated and fell below $20,000 in early March, it has resumed its rally into early 2023. It started around $16,500 in January with a global banking panic sending Bitcoin into overdrive.
“Recent momentum still has some upside potential,” said Alex Kuptsikevich, an analyst at broker FxPro. “The $30,000 area was a significant support for a year and a half up until the middle of last year and now has a high chance of acting as resistance. As we approach $30,000, we should be prepared for the bulls to start taking massive profits.”
Investors have been rocked by a global banking panic in recent weeks, from the March 10 collapse of Silicon Valley Bank to rival UBS (UBS)’s emergency takeover of Credit Suisse (Ticker: CS) on Sunday. Bitcoin and digital assets have rallied despite the turmoil in broader stock markets — to which cryptos have been correlated for more than a year amid the pain of rising interest rates — as the Dow Jones Industrial Average and S&P 500 have tumbled ever lower.
Why is bitcoin recovering?
Advertisement – Scroll to Continue.
“The banking contagion is uniquely positive for crypto in a number of ways,” said Hal Press, founder of crypto hedge fund North Rock Digital.
He pointed out how the situation validates the original use case of cryptos as a global financial alternative and secondly a protection against the debasement of global currencies like the dollar. It also raises the prospect of a return to monetary policies that will benefit Bitcoin and could distract regulators who otherwise appear bent on destroying digital assets. Add in technical market factors and you have five reasons why Bitcoin is rallying.
But not all of these reasons are the same.
Advertisement – Scroll to Continue.
“There are different theoRumors are circulating given Crypto’s strong performance over the past week, and quite frankly, most of them are wishful thinking rather than logic,” said Craig Erlam, an analyst at broker Oanda.
The crypto-native crowd is quick to point to unique characteristics of digital assets to explain the outperformance of Bitcoin and its peers. Bitcoin was created in the midst of the 2008-2009 financial crisis as a decentralized alternative to the traditional banking system, with its programmed monetary policy likely to be a hedge against inflation.
“This is a game-changing moment for Bitcoin,” said Alex Thorn, head of research at digital asset group Galaxy. “While a partially dovish banking system is on the brink, Bitcoin’s resilience, predictability, and relative safety is a definite relief.”
While that may be an exaggeration, there is no doubt that narratives are crucial for traders and it would be a mistake to ignore them entirely. However, market technical factors and shifting expectations about the future of monetary policy are more likely to drive Bitcoin’s price action.
Liquidity in digital asset markets has suffered since the collapse of crypto exchange FTX last November and recent collapses of crypto-focused banks
Advertisement – Scroll to Continue.
Silvergate Capital and Signature Bank have exacerbated the problem. Silvergate and Signature’s respective interbank transfer networks have been widely adopted by institutional crypto market participants, facilitating the movement of funds between investors and exchanges.
A lack of liquidity means that price movements can be amplified and extended, particularly when investors using borrowed money to trade in the more liquid bitcoin futures market are wiped out en masse, causing their positions to swing in the opposite direction.
Advertisement – Scroll to Continue.
According to data provider Coinglass, more than $1 billion in bearish bets against bitcoin have been wiped out in the futures market over the past 10 days as prices surged from $20,000 to over $28,000. These so-called liquidations will add additional upward pressure to an already rising market.
There is also a more fundamental explanation for the crypto rally. Bank stress was the result of losses in bond holdings, an unintended consequence of the US Federal Reserve’s sharp hikes in interest rates last year to combat decades of high inflation. Higher interest rates have weighed heavily on cryptos as well, as demand for risk-sensitive assets is dampened when interest rates rise.
Traders now expect the Fed to become more accommodative on monetary policy as a result of the bank panic, which would be a tailwind for Bitcoin. The tech-heavy Nasdaq’s outperformance over the past week is further evidence of this, as tech stocks are similarly risk-sensitive.
Cryptos have emerged as one of the leading indicators of risk appetite, so Bitcoin’s surge may be just the earliest indication that traders are seeing eventual easing in financial conditions, which will benefit risky assets. Understanding this trend could be key to anticipating how sentiment for broader equities, which has been battered by banking problems, might see a turnaround.
“It’s unusual for such a largely risk-negative event to be so positive for a particular asset class (stocks fall, cryptocurrencies up) and that’s why it’s difficult for people to engage with the current situation,” Press North Rock Digital said.
Beyond bitcoin, ether — the second largest cryptocurrency — rose less than 1% to $1,790 after a buoyant weekend that saw it surge from under $1,700 to over $1,800 on Friday. Smaller cryptos or altcoins showed similar price action, with Cardano up 1% but Polygon down 3% as it capped gains. Memecoins were also off their highs with Dogecoin
Advertisement – Scroll to Continue.
by less than 1% and Shiba Inu by 1.5%.
Write to Jack Denton at [email protected]