Bitcoin Bounce: What’s Next?
The markets this year are crashing, uncertainty abounds and the US government has had to step in to save two large US banks in recent days. So why is bitcoin, considered among the riskiest of them all, rising so quickly?
Just months ago, all forms of cryptocurrency seemed to be going up in flames, with bitcoin plunging from nearly $50,000 at the start of 2022, to less than $17,000 by the time 2023 rolled around.
Bitcoin has since risen more than 60% and climbed another 8% on Friday above $27,000, all at a time of mass layoffs in the tech sector and widespread anxiety about stability in the US banking sector.
So what happened?
The pandemic was an era of massive growth for both tech companies and crypto. This increase started to slow down in late 2021 as people started to travel, go out to restaurants or see a show. They spent much less time in front of screens, and at the same time, the government stimulus checks that allowed people some financial cushion began to end. Crypto began to fall in step with technology. On top of that, in March 2022, the US Federal Reserve began an aggressive series of interest rate hikes, its most powerful weapon to combat inflation, which had begun to rise rapidly.
That sent bitcoin prices into freefall. Higher interest rates mean safe assets like Treasurys are becoming more attractive to investors because their yields have risen, dulling the luster of high-growth companies and other assets that carry more risk. That includes bitcoin.
Still, economic data earlier this year appeared to indicate that inflation had peaked, increasing the chance that the Fed would ease rate hikes, and that was the start of bitcoin’s bounce.
How did the recent bank collapses play into all of this?
The collapse of Silicon Valley Bank and Signature Bank actually led to investments in bitcoin. In the eyes of Wall Street, an unstable financial system further lowered the odds that the Fed could continue raising interest rates, as had been the prevailing expectation as recently as early last week, before Silicon Valley Bank imploded.
“When the economy is headed for a recession, the cryptoverse may look more attractive than stocks,” Edward Moya of Oanda wrote in a research report. “It appears that the downside risk is greater for the S&P 500 than for Bitcoin.”
If an investor on January 1st put $100 in bitcoin and $100 in an S&P 500 index fund, the bitcoin investment would return $60, compared to a $2 return on the S&P bet.
So will bitcoin continue to rise?
All eyes now turn to the Federal Reserve, which meets next week and will make a decision on what to do with the benchmark interest rate.
What the Fed does may not matter at all as far as bitcoin investors are concerned.
“Bitcoin is Dr. Jekyll and Mr. Hyde when it comes to how it reacts to Fed rate expectations,” Moya said. “For most of last year, higher government interest rates along with rising expectations of Fed rate hikes have created problems for Bitcoin. Bets on interest rate cuts are good news for crypto, but a severe recession should prove unsettling for all risky assets, including bitcoin.”