In 2022, the crypto market shattered to pieces, as contagion hit the industry, during the collapses of FTX, Terra, Celsius, and others. This triggered tumbling prices across the market, as Bitcoin slipped by as much as 77% in 2022 compared to its November 2021 all-time high of $69,000. Too, Ethereum traded up to 82% lower in 2022 relative to its November 2021 all-time high.
This year has so far been a whole different story. From changing hands at $16,500 (BTCUSD) and $1,190 (ETHUSD) at the beginning of the year, Bitcoin and Ethereum have surged by over 80% and 60% to $30,100 and $1,910, respectively. In view of this rebound, crypto has been one of the best-performing asset classes year-to-date if not the best, finally attracting the attention of the media on another topic than continuous contagion.
Macro environment, banking crisis, and panic
In our view, there are three predominant reasons for this year’s rally in the crypto market.
In the last few years, crypto advocates have firmly argued that Bitcoin in particular is a hedge against inflation. However, when inflation truly hit the world economy shortly after, causing central banks to respond by increasing interest rates and initiating quantitative tightening to decrease liquidity in 2022, Bitcoin did not satisfy this claim but instead performed badly during the soaring inflation. As inflation and monetary policy were leading factors in the crypto market’s crash last year, we must turn our attention toward these factors as the tide turns. It appears that the market now expects an economic slowdown, forcing central banks to stop interest rate hikes, maybe even slightly lowering them before the year’s end. This has caused an increase in risk appetites just as market participants reassess their portfolios based on a fresh outlook.
In February and March, several American banks ceased operations mainly due to liquidity concerns, strikingly including crypto banks Signature and Silvergate. This triggered a shift in deposits from, for instance, regional banks to large banks, as depositors started to fear additional bank collapses. Due to the decentralized nature of crypto assets, we perceive it likely that the fear of bank collapses has fueled the surge in crypto prices, as crypto somewhat lives outside traditional financial services. Stressed by the claim that Bitcoin is an inflation hedge, one should be critical to every crypto-specific call now or then, including that crypto is somewhat of a “safe haven”, but looking back at the past few months we think crypto’s decentralization has played a positive role in the recent surge of crypto prices.
In hindsight, the market may have panicked too much following the contagion last year, forcing prices down to unsustainably low levels, so the market had to recover more than in normal circumstances. As the market has now likely accounted for the latter and the bank turmoil seems to be over for now, we are largely watching the macro environment going forward. It appears likely that it is the leading factor impacting where to go from here.