it’s been a few months for cryptocurrency Investor. After being robbed last year, the sector has made a strong comeback.
The boom mainly comes in response to changes in expectations of where the economy will grow further. More specifically, the expectations surrounding the actions of the Federal Reserve.
Last year, interest rates tightened at the fastest pace in history. This sucked the liquidity out of the system and as a result the most speculative and high risk sectors suffered particularly badly.
Crypto is one of those high risk areas with of bitcoin The correlation with riskier stocks is still very high. Therefore, a rise in interest rates suppressed bitcoin, as well as the crypto industry at large.
But in 2023 that changed. a global recession has begun to take center stage. Buoyed by the banking wobble over the past month, the market has moved to believe that the Fed may not hike interest rates as aggressively as previously anticipated.
Why are crypto prices rising?
The only problem is that the reasons for this crypto boom have nothing to do with crypto itself. As we discussed above, this is purely macro-driven rally.
This is the reason why tech stocks have rallied. Names like Tesla (up 72%), Meta (up 70%) and Nvidia (up 88%) have also had bumper quarters.
Not only this, but the conditions within the crypto sector have been worrying. Most of the growth pressure has been around regulation.
BUSD was shut down in February, after its New York-based issuer Paxos was forced to stop mining the stablecoin. Its market cap will gradually shrink, a blow to the industry which is now forced to filter into USDC and USDT.
However, the regulators haven’t stopped there. Binance, along with its CEO, Changpeng Zhao, is being sued by the US Commodity Futures and Exchange Commission. The exchange is accused of “violating federal laws” for the US financial markets, including money laundering and terrorism financing laws.
There have also been bankruptcies. Crypto lender Genesis became part of the Digital Currency Group in January and caused another domino collapse ftx collapse in November.
Genesis is also embroiled in a row with Winklevoss-twin-owned Gemini, which owes the former $900 million. To muddy the waters even further, both Gemini and Genesis have been accused by the SEC of breaking securities laws.
Finally, even the biggest crypto-friendly banks have collapsed. Silvergate, Signature and Silicon Valley Bank have all evaporated into thin air. This strikes a significant fiat on-ramp in the industry, which is an undeniable headwind for the industry in the long run.
The bottom line is that as it has been a concerning few months across the board for crypto, there has been less and less good news coming out of the industry. It has only been softening in broad conditions that has pushed prices north.
Liquidity is low and capital is fleeing
Another point to be made regarding rising prices is that the market is as thin as it was before.
Liquidity has seeped out of the industry at an alarming rate. Stablecoin balances on exchanges are at their lowest levels since 2021, while order books are shallow and volumes have declined sharply.
Thin liquidity exacerbates movements both up and down. In this case, the rise has been pushed further upside by a lack of resistance – with this amount of liquidity it doesn’t take much to move the markets.
What happens in the future is anyone’s guess. But over the past few months, it’s been hard to pinpoint anything within crypto that inspired the dizzying gains. Rather, they have continued, with Jerome Powell and the Federal Reserve changing their monetary policy plans to accommodate inflation numbers, recession fears, and banking faltering.
If bitcoin ever splits, all of this would change. But for now, it’s a macro world, and crypto investors are living in it.
Advertisement
Invest in top cryptocurrencies quickly and easily with the world’s largest and most trusted broker, eToro,
10/10
81% of retail CFD accounts lose money