Markets are in turmoil this year, uncertainty abounds and in recent days the US government has had to step in to bail out two major US banks. So why is bitcoin, considered among the riskiest bets of all, growing so fast?
Just a few months ago, all forms of cryptocurrency seemed to go up in flames, with bitcoin plummeting from nearly $50,000 in early 2022, to below $17,000 by the time 2023 rolled around.
Bitcoin has since risen more than 60% and jumped another 8% above $27,000 on Friday, all in an era of mass layoffs in the tech sector and widespread anxiety about stability in the US banking sector.
So what happened?
The pandemic has been an era of massive growth for both tech companies and cryptocurrencies. That surge started to decline in late 2021 as people started traveling, going to restaurants or catching a show. They were spending much less time in front of screens, and at the same time, government stimulus checks that gave people some financial cushion began to wear off. Cryptocurrencies have started to fall in tandem with technology. Furthermore, in March 2022, the US Federal Reserve initiated an aggressive series of rate hikes, its most powerful weapon in fighting inflation, which had begun to mount rapidly.
This has put bitcoin prices in free fall. Higher interest rates mean that safe assets like Treasuries become more attractive to investors because their yields have increased, dulling the luster of high-growth companies and other assets that carry higher risk. This includes bitcoins.
Yet economic data earlier this year seemed to suggest that inflation had peaked, raising the possibility that the Fed would ease rate hikes, and that was the beginning of bitcoin’s rebound.
How have recent bank failures affected all of this?
– Announcement –
The collapse of Silicon Valley Bank and Signature Bank has actually fueled bitcoin investment. In Wall Street’s eyes, a shaky financial system further lowered the odds that the Fed could continue to hike rates, as had been the prevailing expectation until early last week, before the Silicon Valley Bank blew up.
“As the economy heads into a recession, the cryptoverse may look more attractive than stocks,” Oanda’s Edward Moya wrote in a research report. “Downside risks appear to be greater for the S&P 500 than for Bitcoin.”
If an investor invested $100 in bitcoin and $100 in an S&P 500 index fund on Jan. 1, the bitcoin investment would return $60, compared to $2 on the S&P bet.
So will bitcoin continue to rise?
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All eyes are now on the Federal Reserve, which will meet next week and make a decision on what to do about its key interest rate.
What the Fed does may not matter 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 Treasury yields coupled with rising Fed rate hike expectations caused problems for Bitcoin. Fed rate cut bets are good news for cryptocurrencies, but a severe recession should prove worrisome for all risky assets, including bitcoin.