Crypto is rising for the wrong reasons

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March 30, 2023
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4 min read
Ethereum coin, cash (dollars)
Image by WorldSpectrum from Pixabay

Key takeaways:

  • The crypto market has grown by 40% — $20,000 to $28,000 — between January 15, 2023, and March 24, 2023.
  • Experts attribute recovery efforts by the US Federal Reserves (Feds) to mitigate the effects of recent bank failures as one of the reasons for the rise.
  • However, this reason for the market rise could also cause inflation rates to go higher.

Even a casual observer knows that 2022 was a rough year for the crypto market. It was blow after blow in 2022, plunging the market into a perpetual state of redness. Casual traders like me could only watch as our investments lost value.

It started with the US Federal Reserve aggressively increasing interest rates to tame inflation levels after the pandemic. High interest rates meant that borrowing to invest in assets was not a good move, as it sent stocks, crypto, and other forms of investments crashing.

As if the interest rate hike was not enough to make people more averse to investing in crypto, Terra Luna's crash caused more investors to steer clear of the crypto market. The Luna crash was one of the biggest crypto hits ever, wiping out $60 billion from the market in hours.

The crash happened in May 2022 when $2 billion of Terra's stablecoin, TerraUSD, was sold off, making the dollar-pegged stablecoin lose its value. While it is unknown what caused the sell-off, Terra's CEO, Do Kwon, was recently arrested and charged with fraud.

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By June 2022, Bitcoin was down 60%, and other coins like Solana and Polkadot had fallen by 90%. And there were more hits on the market, such as the big crypto lender, Celsius, freezing customer withdrawals because of the declining market.

One of the most brutal and shocking hits of all was the FTX crash.

 The crypto market recovers 

By January 2023, Bitcoin showed signs of recovery after its price had dropped below $15,000, and traders were excited to see the digital asset rise to $21,000.

Ademi, a full-time trader, put the rise down to the short supply of Bitcoin. At the time, huge crypto investors, aka crypto whales, were buying up large amounts of the currency.

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On the other hand, Michael Ugwu, an angel investor and CEO of FreeMe Digital, said the rise was due to news of improving macroeconomic conditions. He added that if the economic conditions did not change, the rise in the price of crypto assets would not be sustained.

 Why is crypto still going up? 

A phone with crypto market charts on the screen
Photo by Behnam Norouzi on Unsplash

US inflation rates slowed to 6% in February 2023, compared to 9% in April 2022. According to Trading Economics, the prices of food, cars, and trucks are growing at slower rates in 2023 than in 2022.

While news like this could determine the prices of cryptocurrencies, the fall of three US banks could be the leading cause.

Silicon Valley Bank (SVB), Silvergate Capital, and Signature Bank are US banks that collapsed within a week of each other.

Silvergate Capital announced its failure on March 8, 2023, while SVB failed two days later, on March 10 and Signature Bank four days later, on March 12.

The collapse of these banks is leading to a rise in crypto prices because the US government announced plans to cover their debts.  

The Federal Deposit Insurance Corp (FDIC) and the Federal Reserve Board said in a joint statement that every SVB depositor would have access to all their money.

However, before the announcement, the Bitcoin price dropped by 10%.

Popular stablecoin, USDC, lost its stability as its issuer, Circle, held its funds as Silvergate Capital; the coin regained its peg to the dollar after the FDIC announced it.

Capital market commentator Holger Zschaepitz explained in a tweet why the liquidity injection into the market is causing even stocks to rise.

The Fed also had to lend $300 billion to banks to avoid a domino effect after SVB, Silvergate, and Signature Bank failed. The banks have borrowed an amount equal to half of what was needed to save financial institutions during the 2008 financial crisis.

More money, more inflation

While the crypto and stock markets are booming due to lower interest rates and $300 billion of liquidity pumped into the system, these could lead to inflation rates rising again.

The last crypto bull run that saw crypto reach an all-time high of $69,000 was caused by the Fed printing $4.189 trillion in response to COVID in 2020, resulting in high inflation rates in 2022. 

We could have a repeat, with interest rates currently low and $300 billion being injected into the system.

This situation puts the Fed in a difficult position where it has to choose between saving the banking sector and ensuring financial stability or continuing its fight against inflation.

This Fortune article by Philipp Carlsson-Szlezak, Managing Director and Partner at BCG's and Paul Swartz, Director and Senior Economist at the BCG Henderson Institute in New York, said, "The new reality of having to balance financial stability risks with structural inflation risks undoubtedly has pushed up the likelihood of a recession."

This means that while traders might be enjoying the crypto bull run, a recession looms, and it could leave the crypto market worse than it was at the end of November 2022.

He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.
He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.
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He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.

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