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5 Reasons Bitcoin’s Price Is Rising Amid Bank Panic One is the key for stocks.




Bitcoin

and other cryptocurrencies marched higher again on Monday, continuing a recent rally into a new week in the face of turmoil across financial markets. There are at least five reasons why digital assets can outperform – and one is key for stocks.

The price of Bitcoin has risen 4% in the past 24 hours to over $28,300, after trading above $28,500 at points to reach the highest levels since the crypto crash accelerated last June. After stagnating and falling below $20,000 in early March, the biggest digital asset has resumed its rally to start 2023. It began in January around $16,500 with a global banking panic that sent Bitcoin into high gear.

“The recent momentum still has upside potential,”[ads1]; said Alex Kuptsikevich, an analyst at broker FxPro. “The $30,000 area was a significant support for a year and a half until the middle of last year, and now has a great chance to act as resistance. As we approach the $30,000 level, we should be prepared for the bulls to start taking massive profits.” »

Investors have been rocked by a global panic over banks in recent weeks, from the failure of Silicon Valley Bank on March 10 to the emergency takeover of Credit Suisse (ticker: CS ) by rival UBS ( UBS ) on Sunday. Bitcoin and digital assets have rallied despite turmoil in broader equity markets — with which crypto has been correlated for more than a year amid the pain of rising interest rates — as


Dow Jones Industrial Average

and


S&P 500

has slipped lower and lower.

Why is Bitcoin rallying?

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“The bank contagion is uniquely positive for crypto in several ways,” said Hal Press, founder of crypto hedge fund North Rock Digital.

He pointed out how the situation validates the original use of cryptos as, one, a global financial option, and, two, a protection against the deterioration of global currencies like the dollar. It also raises the prospect of a return to monetary policy that would benefit Bitcoin, and could distract regulators who have otherwise seemed intent on getting rid of digital assets. Add technical market factors into the mix and you have five reasons why Bitcoin is on the rise.

But not all of these reasons are the same.

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“There are different teories floating around about crypto’s strong performance over the past week, and frankly, the majority of them are more wishful thinking than logic, says Craig Erlam, analyst at broker Oanda.

The crypto-native crowd is quick to point to unique characteristics of digital assets to better explain the performance of Bitcoin and its peers. Bitcoin was founded in the midst of the 2008-2009 financial crisis as a decentralized alternative to the traditional banking system, with the programmed monetary policy expected to be a hedge against inflation.

“This is a seminal moment for Bitcoin,” said Alex Thorn, head of research at digital asset group Galaxy. “As a fractional reserve banking system teeters on the brink, Bitcoin’s resilience, predictability and relative safety stand in stark relief.”

While that may be overstating the case, there’s no doubt that narratives are key for traders, and it would be a mistake to discount them entirely. That said, technical market factors and shifting expectations for the future of monetary policy are more likely to drive Bitcoin’s price action.

Liquidity in digital asset markets has suffered since the collapse of crypto exchange FTX last November, and the recent collapses of crypto-focused banks

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Silvergate Capital and Signature Bank have compounded the problem. Silvergate and Signature’s respective interbank transfer networks were widely used by institutional crypto market participants, facilitating the movement of funds between investors and exchanges.

A lack of liquidity means that price movements can be amplified and extended, especially if investors using borrowed money to trade the more liquid Bitcoin futures market exit en masse, causing swings in the opposite direction from their positions.

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More than $1 billion in bearish bets against Bitcoin in the futures market have been wiped out in the past 10 days, according to data provider Coinglass, as prices have risen from $20,000 to above $28,000. These so-called liquidations will have put upward pressure on an already rising market.

There is also a more fundamental explanation for the crypto rally. Bank stress has resulted from losses on bond holdings, an unintended consequence of the Federal Reserve dramatically raising interest rates over the past year to combat decades of high inflation. Higher prices have also weighed heavily on crypto, as demand for risk-sensitive assets is dampened as prices rise.

Traders now expect the Fed to be more accommodative on monetary policy as a result of the banking panic, which will be a tailwind for Bitcoin. The performance of the tech-heavy Nasdaq last week is further evidence of this since tech stocks are just as sensitive to risk.

Cryptos have proven to be among the most leading indicators of risk sentiment, so Bitcoin’s peak may just be the earliest expression of traders seeing an eventual easing of economic conditions benefiting riskier assets. Understanding this trend could be key to gauging how sentiment for stocks more broadly, hit by banking woes, could see a turnaround.

“It’s unusual to have such a broadly risk-negative event that’s so positive for a particular asset class (stocks down, crypto up) and this is why it’s hard for people to wrap their heads around the current situation,” said Pressed by North Rock Digital.

Beyond Bitcoin,


Ether

— the second-largest crypto commodity — was up less than 1% at $1,790 after a buoyant weekend that saw it top $1,800 from below $1,700 on Friday. Smaller cryptos or altcoins showed similar price action, with


Cardano

1% higher though


Polygon

3% lower as the pair pared gains. Memecoins were also of their heights, with


Dogecoin

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down less than 1% and


Shiba Inu

reduction 1.5%.

Write to Jack Denton at jack.denton@barrons.com



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