Cryptocurrency prices have had a strong quarter, prices rallied north. However, conditions within the industry have worsened, according to Dan Ashmore. Bull run simply on softer macro conditions, with interest rate expectations falling.
It’s been a friendly few months for cryptocurrency investors. After being looted last year, the sector has rebounded strongly. In 2023, interest rates tightened at the fastest pace in history. This sucked liquidity out of the system and, as a result, the most speculative and high-risk sectors suffered particularly.
The crypto sector is one of the highest-risk ones, with the correlation of Bitcoin still extremely high with respect to risky stocks. Therefore, the interest rate hikes drowned Bitcoin as well as the crypto industry in general.
However, the picture is different in 2023. Inflation, still very high, has eased in the last two quarters, but at least it is now on a downward trend. Meanwhile, fears of a global recession have begun to resonate. Exacerbated by the bank swings over the last month, the market has moved to assume that the Federal Reserve cannot raise interest rates as aggressively as previously anticipated.
Why Are Cryptocurrency Prices Rising?
The reasons for the rise of cryptocurrencies have nothing to do with cryptocurrencies. This is a purely macro-driven hike. Actually, it is about the same reason tech stocks are up. Names like Tesla (up 72%), Meta (up 70%), and Nvidia (up 88%) have also had an excellent quarter.
However, regulators have not stopped. Binance, along with its CEO Changpeng Zhao, is being sued by the US Commodity Futures and Exchange Commission. The allegation is that the exchange “disregarded federal laws” for US financial markets. including money laundering and terrorist financing laws. In addition, there have been bankruptcies, an example of which is the case of Crypto lender Genesis which went under in January, due to the FTX crash in November.
There is also the collapse of the largest crypto banks, Silvergate, Signature, and Silicon Valley Bank, which have all evaporated into thin air. This attacks a vital fiat onramp in the industry, an unquestionable headwind for the industry in the long run.
It’s clearly been a pretty eventful few months across the board for cryptocurrencies, with little good news coming out of the industry. What has reinvigorated the rise in prices is the softening of macro conditions.
Low Liquidity, Capital Fleeing
Liquidity has flown out of the industry at an alarming rate. Stablecoin balances on exchanges are at their lowest level since 2021, while order books are shallow and volumes have dropped sharply.
Low liquidity exacerbates both upward and downward movements. It is difficult to know what will happen in the future; what is known is that Jerome Powell and the Federal Reserve continue to hold their own, with their monetary policy plans changing to accommodate inflation figures, recession fears, as well as bank swings.
This whole landscape will be different, as Bitcoin ever decouples. However, at the moment it is a macro world, and crypto investors live in it.
By Audy Castaneda
