and other cryptocurrencies marched higher again Monday, continuing a recent rally into a new week in the face of turmoil across financial markets. There are at least five reasons why digital assets may be outperforming—and one is key for stocks.
The price of Bitcoin has risen 4% over the past 24 hours to above $28,300, having traded above $28,500 at points to hit the highest levels since the crypto crash accelerated last June. After stagnating and falling below $20,000 at the start of March, the largest digital asset has resumed its rally to start 2023. It began January around $16,500 with a global banking panic kicking Bitcoin into high gear.
“The 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 until the middle of last year and now has a high chance of acting as resistance. As we approach the $30,000 level, we should be prepared for the bulls to start taking massive profits.”
Investors have been rocked by a global panic over banks in recent weeks, from the failure of Silicon Valley Bank on March 10 to the emergency takeover of
(ticker: CS) by rival
(UBS) on Sunday. Bitcoin and digital assets have rallied despite the turmoil in wider stock markets—with which cryptos have been correlated for more than a year amid the pain of rising interest rates—as the
and
have slid lower and lower.
Why is Bitcoin rallying?
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“The banking contagion is uniquely positive for crypto in multiple ways,” said Hal Press, the founder of crypto hedge fund North Rock Digital.
He pointed to how the situation validates the original use case of cryptos as, one, a global financial alternative, and, two, a protection against the debasement of global currencies like the dollar. It also raises the prospect of a return to monetary policy that will benefit Bitcoin, and may distract regulators that have otherwise appeared hell-bent on quashing digital assets. Add technical market factors into the mix and you have five reasons why Bitcoin is rallying.
But not all these reasons are equal.
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“There are various theories floating around regarding crypto’s strong performance over the last week and frankly, the majority of them are more wishful thinking 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 founded in the midst of the 2008-2009 financial crisis as a decentralized alternative to the traditional banking system, with its programmed monetary policy expected to be a hedge against inflation.
“This is a seminal moment for Bitcoin,” said Alex Thorn, the head of research at digital asset group Galaxy. “As a fractionally reserved banking system teeters on the brink, Bitcoin’s resilience, predictability, and relative safety stands in stark relief.”
While that may be overstating the matter, there is no doubt that narratives are key for traders and it would be a mistake to discount them entirely. That being said, it is more likely that technical market factors and shifting expectations over the future of monetary policy are driving Bitcoin’s price action.
Liquidity in digital asset markets has suffered since the meltdown of crypto exchange FTX last November, and the recent collapses of crypto-focused banks
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and Signature Bank has exacerbated the issue. Silvergate and Signature’s respective interbank transfer networks were widely used by institutional crypto market participants, facilitating the movement of funds between investors and exchanges.
A lack of liquidity means that price moves can be amplified and extended, especially if investors using borrowed money to trade in the more liquid Bitcoin futures market are wiped out en masse, which causes swings in the opposite direction from their positions.
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More than $1 billion in bearish bets against Bitcoin in the futures market have been wiped out in the past 10 days, according to data provider Coinglass, as prices have risen from $20,000 to above $28,000. These so-called liquidations will have added upward pressure to an already-rising market.
There is also a more fundamental explanation for the crypto rally. Bank stresses have been a result of losses on bondholdings, an unintended consequence of the Federal Reserve dramatically raising interest rates over the past year to combat decades-high inflation. Higher rates also have weighed heavily on cryptos, as demand for risk-sensitive assets is dampened when rates rise.
Traders now expect the Fed to be more accommodating on monetary policy as a result of the bank panic, which would be a tailwind for Bitcoin. The outperformance of the tech-heavy Nasdaq last week is further evidence for this since tech stocks are similarly sensitive to risk.
Cryptos have shown themselves to be among the most leading-edge indicators of risk sentiment, so Bitcoin’s spike may just be the earliest expression of traders seeing an eventual easing of financial conditions that benefit risky assets. Understanding this trend could be key for gauging how sentiment for stocks more broadly, battered by bank woes, could see a turnaround.
“It is unusual to have such a broadly risk-negative event be so positive for a specific asset class (stocks down, crypto up) and this is why it is hard for people to wrap their heads around the current situation,” said Press of North Rock Digital.
Beyond Bitcoin,
—the second-largest crypto—was up less than 1% at $1,790 after a buoyant weekend that saw it top $1,800 from below $1,700 on Friday. Smaller cryptos or altcoins exhibited similar price action, with
1% higher but
3% lower as it pared gains. Memecoins were also off their highs, with
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down less than 1% and
shedding 1.5%.
Write to Jack Denton at jack.denton@barrons.com
