Bitcoin hit its highest level in nine months on Friday as crypto traders shifted funds away from banks and warmed to rapidly shifting interest rate expectations.
The dollar-denominated price of the original and biggest crypto coin has surged more than 30 per cent this week to more than $27,000, its highest point since the onset of the crisis of confidence that engulfed the market last summer. The second-largest token, ether, has risen a fifth in the same period.
Buyers have emerged after a week of acute turbulence for the world’s banking industry on both sides of the Atlantic as investors fret over the valuations of smaller banks’ bond portfolios and business models.
The US government and large banks stepped in to steady the system while the Swiss central bank provided a $54bn emergency backstop for lender Credit Suisse. The uncertainty has prompted speculation that the Federal Reserve and European Central Bank will pause their plans to raise interest rates aggressively to curb lingering inflation.
For the past 18 months the price of bitcoin, once touted as a hedge against inflation, has often been correlated with traditional stock indices such as the S&P 500 and the Nasdaq Composite, and sensitive to traders’ expectations on interest rates.
Traders point out that when investors have fears over crypto prices, they move funds into bank deposits and stablecoins. When there are concerns over banks, they rapidly move to purchasing tokens.
“Fears over the stability of the banking system, along with declining real interest rates, creates a good environment for bitcoin to rebound because it is seen by some investors as a hedge against systemic risks,” said Ilan Solot, co-head of digital assets at London broker Marex.
The market recovery has also been bolstered after reassurances from US authorities that deposits at the failed Silicon Valley Bank would be protected.
Circle, operator of the crypto market’s second largest stablecoin USDC, admitted it had $3.3bn trapped at SVB, triggering a temporary decline in the value of the stablecoin to 88 cents.
Stablecoins act as a conduit between crypto and sovereign money and are supposed to maintain their value one-for-one against the dollar at all times.
Despite a short-term recovery for digital assets, turbulence in the banking sector casts doubt over the crypto industry’s long-term footprint in the US.
Together with Silvergate and Signature, SVB was one of a tripartite of crypto-friendly banks that met their demise in recent days. Their failures have sparked fears among industry supporters that the US is de-banking the crypto industry.
Republican congressman Tom Emmer on Wednesday wrote a letter to the Federal Deposit Insurance Corporation, arguing that the regulator was purposely seeking to limit the banking industry’s exposure to crypto markets.
“A lot of people already understand the industry is rotating away from the United States, so in many ways, America’s crypto clampdown has been priced in by the market,” Solot said.