Markets have been in turmoil this year, uncertainty remains high and the US government has had to step in in recent days to rescue two big US banks. So why is bitcoin, considered one of the riskiest bets of them all, rising so quickly?
Just months ago, all forms of cryptocurrency appeared to be going up in flames, with bitcoin plunging from nearly $50,000 by early 2022 to less than $17,000 around 2023.
Since then bitcoin has risen more than 60% and climbed 8% above $27,000 on Friday, all in an era of mass layoffs in the tech sector and widespread concern about the stability of the US banking sector.
The pandemic was an era of massive growth for both technology companies and crypto. This boom started to subside in late 2021 as people started traveling, going to restaurants or watching shows. They spent little time in front of the screen and also, government stimulus checks allowed people to be provided with some financial support. Crypto began to fall in tandem with technology. On top of that, in March 2022, the US Federal Reserve began an aggressive string of rate hikes, its most powerful weapon to fight inflation, which had begun to rise rapidly.
This put bitcoin prices into freefall. Higher interest rates mean that safe assets like Treasuries become more attractive to investors because their yields have risen, dimming the luster of high-growth companies and other assets that carry more risk. Which includes bitcoin.
Yet earlier this year economic data showed inflation had peaked, raising the prospect that the Fed would ease on rate hikes, and that was the start of the bitcoin boom.
How does the recent bank collapse play into all this?
The collapse of Silicon Valley Bank and Signature Bank actually fueled investment in bitcoin. In Wall Street's eyes, a shaky financial system further reduced the odds that the Fed could continue raising rates, as was the prevailing expectation as recently as early last week before the Silicon Valley bank implosion.
“With the economy heading into recession, cryptoverse may look more attractive than equities,” Edward Moya of OANDA wrote in a research report. “It appears that the downside risks are greater for the S&P 500 than for bitcoin.”
If an investor puts $100 in bitcoin and $100 in an S&P 500 index fund on January 1, the bitcoin investment will return $60, compared to the $2 return on the S&P bet.
So will bitcoin keep rising?
All eyes now turn to the Federal Reserve, which meets next week and will decide what to do about its benchmark interest rate.
What the Fed does doesn't matter as far as bitcoin investors are concerned.
“Bitcoin is Dr. Jekyll and Mr. Hyde when it comes to reacting to Fed rate expectations,” Moya said. “For much of the past year, rising Fed rate hike expectations coupled with higher Treasury yields spelled trouble for Bitcoin. Fed rate cut bets are good news for crypto, but a severe bearish spell for all including Bitcoin. Should prove troublesome for riskier assets.