At the start of this year Bitcoin was still struggling, having endured a dismal 2022 with plummeting cryptocurrency prices, bankruptcies and corporate scandals on an unprecedented scale. But in March, bitcoin, as the largest cryptocurrency by market capitalisation, regained its momentum with a rise of more than 70% since the beginning of this year, outperforming other major assets, and as of yesterday surpassed the $30,000 mark for the first time since June 2022.
Is Macro Moving Digital Assets?
Investors seem to regain confidence while crypto market turmoil is beginning to dissipate. According to Jurrien Timmer, director of Global Macro at Fidelity, we are at the intersection of earnings growth and the liquidity cycle. First-quarter earnings, which will arrive soon, and the Fed’s next moves, whatever they may be, will play a huge role in the market’s direction from here.
So what’s next for the Fed? The market seems to be pricing in roughly 50/50 odds for one more rate hike in May, followed by a large easing cycle starting this summer according to Timmer. Despite concerns that a banking crisis could have further macroeconomic impact, markets expect that central bank hikes to the cost of credit are nearing their peak, and such a scenario is set to signal risk-on assets such as bitcoin, six investors and analysts from crypto and traditional finance told Reuters.
“The macro narrative is the number one,” said Noelle Acheson, an economist who has tracked the crypto sector for seven years. “Bitcoin is not just a risk asset, it is arguably the most sensitive to monetary liquidity out of all of the risk assets.”
Reuters
Other Factors Could Be At Play
While over the past year, macro conditions have not been the primary focus, instead, individual failures in the crypto market, such as FTX, Terra LUNA/UST, BlockFi, and Genesis amongst others have been the primary drivers of crashing prices.
Macro seems to have regained prominence in the past few weeks: The banking crisis and subsequent policy response having a positive effect on digital assets while other asset classes face losses, which could be the driving force behind this move.
Recent failures of Silicon Valley, Signature banks and Switzerland’s Tradfi Giant Credit Suisse have damaged confidence in the stability of global monetary systems, which could have reignited investors’ appetite for assets that are immune to counterparty risk and central power, inherent in traditional finance.
Further, the US Federal Reserve has been met with market scepticism. At the beginning of the month, the two-year Treasury yield was 5.08%, but now it stands at 3.75% – a remarkable decline. The Federal Reserve has simultaneously raised its benchmark rate by 25 basis points (bps) to 5%, but the fed funds rate is still lower than the two-year yields. This difference of 125 bps is now the greatest since 2007 and usually prompts swift and drastic rate reductions.
Not to be outdone, Treasury Secretary Janet Yellen has also been criticised recently for her lack of clarity on offering full support to depositors of failed regional US banks, and for flip-flopping on her position regarding an increase in deposit insurance. This follows Yellen’s 2017 statement that she did not believe another financial crisis would occur in her lifetime.
With the above in mind, it shouldn’t come as a surprise that crypto app downloads increased 15% last week, while banking app downloads decreased by about 5%. The market appears to be displaying its lack of faith in governments and financial institutions by developing an interest in a possible alternate solution. This is ironic as the rise in crypto adoption coincides with the Security and Exchange Commission’s battle against digital assets.
Digital Assets Are Here To Stay
Executive vice president of BNY Mellon, Roman Demissie, recently declared that digital assets are “here to stay.” He highlighted a survey conducted by the banking giant in October, which found that 91% of custodian bank clients were interested in investing in blockchain-based tokenized products. Despite the cryptocurrency market downturn in 2022, 88% of those surveyed still plan to invest in the digital asset sector over the long term.
This sentiment is echoed by other top financial leaders. For example, JPMorgan CEO Jamie Dimon has been vocal about his distaste for Bitcoin, yet his firm has explored blockchain-based services in recent years. In November last year, the bank was able to execute its first-ever cross-border transaction using decentralized finance on a public blockchain. Also Swiss Government-Owned Bank PostFinance is looking to get involved, by offering its 2.5 million customers access to buy, store and sell Bitcoin and Ether through a partnership with Sygnum Bank.
Key Takes
Bitcoin has undergone a resurgence since the beginning of this year, with prices rising more than 70%, outperforming other assets. This could be due to investors regaining confidence in the FEDs monetary policy, and expectations of one more rate hike in May followed by a large easing cycle starting this summer.
Other factors at play include the current banking crisis, lack of confidence in governments and financial institutions, and increasing adoption of cryptocurrencies. Top financial leaders are also expressing their belief that digital assets are here to stay.
Though regardless of wild speculation about further FED rate hikes or what happens in the near-term, the consensus remains: we are beyond the point where blockchain and cryptocurrencies can suddenly become obsolete.
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