Markets are in turmoil this year, uncertainty is high and the US government has had to intervene in recent days to bail out two major American banks. So why is Bitcoin, considered one of the riskiest bets of all, rising so fast?
Just a few months ago, all forms of cryptocurrency seemed to erupt in flames, with Bitcoin plummeting from nearly $50,000 in early 2022 to less than $17,000 in 2023.
Since then, bitcoin is up more than 60% and another 8% on Friday to pass $27,000, all at a time of mass layoffs in the tech sector and widespread concerns about stability in the US banking sector.
So what happened?
The pandemic has been an era of massive growth for both tech companies and crypto. This surge started to taper off in late 2021 as people started travelling, going out to restaurants or seeing a show. They were spending far less time in front of screens, and at the same time, the government stimulus checks that gave people some financial cushion were starting to run out. Crypto started falling in line with technology. Additionally, in March 2022, the US Federal Reserve began an aggressive series of rate hikes, its strongest weapon to fight inflation, which had started to rise rapidly.
This sent bitcoin prices into free fall. Higher interest rates mean safe-haven assets like Treasuries are becoming more attractive to investors as their yields have risen, dulling the shine of high-growth companies and other higher-risk assets. This includes bitcoin.
However, economic data earlier this year seemed to indicate that inflation had peaked, increasing the likelihood that the Fed would ease rate hikes, and that was the start of Bitcoin’s bull run.
How have the recent bank failures contributed to all of this?
The collapse of Silicon Valley Bank and Signature Bank has actually fueled investment in Bitcoin. In Wall Street’s eyes, a shaky financial system further reduced the chances that the Fed could hike rates further, as was the prevailing expectation early last week before the Silicon Valley bank exploded.
“As the economy heads into recession, the cryptoverse may look more attractive than stocks,” Oanda’s Edward Moya wrote in a research paper. “It appears that the downside risks for the S&P 500 are greater than for Bitcoin.”
If an investor had invested $100 in bitcoin and $100 in an S&P 500 index fund on Jan. 1, the bitcoin investment would have returned $60, compared to a $2 return on the S&P -Bet.
So will Bitcoin keep going up?
All eyes are now on the Federal Reserve, which will meet next week and make a decision on what to do with its interest rate benchmark.
What the Fed does may not matter at all to Bitcoin investors.
“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 Treasury yields coupled with rising expectations of a Fed rate hike spelled trouble for Bitcoin. Fed rate cut bets are good news for cryptos, but a severe recession should prove troubling for all risky assets, including Bitcoin.”
Source : finance.yahoo.com