Despite broad worries that have recently permeated the financial markets, the boom in Bitcoin and other cryptocurrencies is back in full swing. The primary reason why also implies that important economic figures expected on Tuesday pose a significant risk.
The largest digital asset’s price has increased 10% in the last day to above $24,300, levels it hasn’t reached since mid-February. From approximately $16,500 at the beginning of January, Bitcoin surged to a peak above $25,000 last month.
But, the cryptocurrency’s upward movement stopped in March, and this week it fell below the $20,000 mark due to concerns about crypto banks and the regulatory environment. The most recent price movement indicates that Bitcoin has resumed its upward trend. For how long, though?
The two significant U.S. banks in the crypto business, Silvergate Capital and Signature Bank, both collapsed in the past week alone. Traders then faced grave concerns about how deposits at that institution may threaten the stability of a major stablecoin amid Silicon Valley Bank’s banking difficulties. As we can understand, this is bad news for market liquidity as well as regulators’ attitudes toward digital assets.
Despite these challenges, Bitcoin has been able to increase its gains. Even if the Dow Jones Industrial Average and S&P 500 generally declined on Monday as Bitcoin rose, it is more likely that the rise in cryptocurrencies results from the link between digital assets and stocks.
Cryptocurrencies and equities are very sensitive to the macroeconomic backdrop of rising interest rates. In a week, markets have shifted from anticipating a greater 50 basis-point rate rise this month to pricing in a fair likelihood that the Fed would hold rates constant due to bank difficulties. Yet the crisis at U.S. banks has triggered soul-searching for future monetary policy expectations, partly owing to losses on bond holdings due to rising rates.
This is a major boost for cryptocurrencies, which are even more rate-sensitive than the unshakable Dow and S&P 500 stocks. The Nasdaq Composite index, which is even more closely tied to bitcoin, was the only one of the three major indices to rise on Monday, driven by exactly the same strength of the change in macroeconomic expectations.
But this is a risky situation for bitcoin on Tuesday when the February Consumer Price Index (CPI) will be released. The CPI is a key indicator of inflation, and high inflation for decades is what caused the Fed to raise rates last year.
However, Bitcoin’s recent outperformance of equities is not evidence that it has abandoned macro concerns but rather demonstrates how vulnerable cryptos are to the macro picture. While markets expect the Fed to be more accommodating in light of the recent financial sector turmoil, a strong CPI report has the ability to upset those expectations or, at the very least, solidify a rate rise of some type next week.
Outside Bitcoin, Ether, the second-largest cryptocurrency, increased by 6% to $1,670. Smaller tokens or altcoins also performed well, with Cardano rising 3% and Polygon rising 4%. Memecoins were also up 3%, with Dogecoin and Shiba Inu up 3%.