Bitcoin reached its highest level in nine months on Friday as crypto traders moved money away from banks and warmed to rapidly changing interest rate expectations.
The dollar-denominated price of the original and largest cryptocurrency is up more than 30 percent this week to more than $27,000, the highest since the confidence crisis that swept the market last summer began. The second largest token, ether, is up by a fifth over the same period.
Buyers have emerged after a week of acute turbulence for the global banking sector on both sides of the Atlantic, as investors worry about the valuations of smaller banks’ bond portfolios and business models.
The US government and major banks stepped in to stabilize the system, while the Swiss central bank offered a $54 billion bailout to lender Credit Suisse. The uncertainty has led to speculation that the Federal Reserve and the European Central Bank will pause their plans to aggressively raise interest rates to curb ongoing inflation.
For the past 18 months, the price of bitcoin, once touted as a hedge against inflation, has often correlated with traditional stock indices such as the S&P 500 and the Nasdaq Composite, and sensitive to traders’ expectations of interest rates.
Traders point out that when investors fear crypto prices, they move money into bank deposits and stablecoins. When there are concerns about banks, they quickly turn to buying tokens.
“Anxieties about the stability of the banking system, along with falling real interest rates, create a good environment for bitcoin to recover, as it is seen by some investors as a hedge against systemic risk,” said Ilan Solot, co-head of digital assets. with the London broker Marex.
The market recovery was also strengthened after assurances from the US authorities that deposits at the bankrupt Silicon Valley Bank would be protected.
Circle, operator of the second largest USDC stablecoin in the crypto market, admitted it had $3.3 billion tied up with SVB, temporarily dropping the value of the stablecoin to 88 cents.
Stablecoins act as a conduit between crypto and sovereign money and should maintain their value one-to-one against the dollar at all times.
Despite a near-term recovery for digital assets, the turbulence in the banking sector casts doubt on the long-term footprint of the crypto industry in the US.
Along with Silvergate and Signature, SVB was one of the tripartite crypto-friendly banks to go under in recent days. Their failures have led to fears among industry supporters that the US is de-banking the crypto industry.
Republican congressman Tom Emmer wrote a letter to the Federal Deposit Insurance Corporation on Wednesday, arguing that the regulator was deliberately trying to limit the banking sector’s exposure to crypto markets.
“A lot of people already understand that the industry is pivoting away from the United States, so in many ways US crypto repression has been priced into the market,” Solot said.