Why is Bitcoin going up? $26K breached but there is reason for suspicion

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key takeaways

  • Bitcoin surges above $26,000 on falling interest rate expectations
  • Inflation readings provide further momentum as investors dream of a return to a low-interest environment and a rise in crypto prices
  • However, here are the reasons for the hesitation, writes our analyst Dan Ashmore.
  • The closure of three crypto banks will hurt the industry, while the beginning of the year has been nothing but recession
  • Divergence from other risk assets is also unusual and has not seen upside since 2021

I don’t really make predictions because what’s the point? I’m just a guy hitting keys on a laptop, and I know better than to fool myself that I know enough to predict the market.

However, its speed Bitcoin The run-up surprised me. Not that you should put any weight into this – if you’re in the habit of trusting people’s word on the internet, I suspect your bank wallet is already hurting anyway – but let me explain what I mean. is confusing.

What is happening to bitcoin?

First, let’s take a look at what has happened over the past week to start this rally.

We saw the shocking collapse of Silicon Valley Bank (SVB) last week, followed by Silvergate, which sent shock waves throughout the market. This had particular implications for crypto for a few reasons.

The first was USDC, the second largest stablecoin in the market. With the SVB revealed to have 8.25% of its reserves, the market feared the solvency of the stablecoin. Of course, this fear was dispelled when the US administration stepped in to address the crisis and the guarantee deposits would be met.

This caused panic and crypto started to rebound. But that’s not all. The fact that the banking sector so swiftly changed market expectations around the future path of interest rate hikes.

With that seemingly obvious, the market has moved to bet that the Fed will more or less hike interest rates. Fed futures currently give a 72% chance of no hike at next week’s Fed meeting. Just last week, it was 0%, with the baseline expectation (70%) expecting a 50 bps increase.

Looking at the longer-term trajectory, the forecast has shifted even more dramatically. The probability of higher rates in July is now only 1.6%, compared to 100% last week, again looking at futures. There is also a 31% chance that rates will be lower in July than they are today. This is a remarkable flip.

This has sent bitcoin aggressively upward, rising to over $26,000 as I write this, its highest level since last June. Also helping is the CPI reading this afternoon, which is coming in at 6%, its eighth consecutive decline and the lowest metric since September 2021.

Has bitcoin gone too high?

But does it mean anything?

While on the one hand, this is exactly what we would expect given the high volatility in rate forecasts, I am confused about the outperformance versus the large scale of other riskier assets. This is a divergence we haven’t seen since the rise of the 2021 bull market.

This idea should be provided. Of course, bitcoin has been capable of moves that other assets can only dream of matching, so perhaps it’s just doing what it loves to do.

But then there are the implications of losing three crypto-friendly banks – Silvergate, SVB and Signature. The environment in the US is now barren for crypto firms. Whether he can easily go abroad remains to be seen.

But still, the fact that the world’s largest economy is bailing out these crypto firms doesn’t bode well for the industry at large. Does it have anything to do with bitcoin specifically? No, but driven by market sentiment, and also the fact that ramping up is very difficult now, and bitcoin is still very much tied to the crypto industry as a whole.

The tighter regulatory environment, headlined by the shutdown of BUSD last month, has already worsened significantly since the start of the year. Throw in the various bankruptcies that followed FTX (led by the genesis and demise of DCG) and there are a lot of bearish variables here regarding the long-term future of the crypto industry.

This is not to say that all of these can be overcome. But for crypto to be isolated from other risk assets to such an extent after the closure of three important banks for the industry provides food for thought. We haven’t seen $26,000 in a long time, and it looks – to my far-confident mind – like it’s still a little premature.

I guess time will tell, but for now, it’s a good change to see some green on the charts for a change.

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