There are likely several reasons why conditions for cryptocurrencies to thrive remain intact.
The Bitcoin exchange rate has rebounded from the lows seen in November 2022 after tumbling from 63,300 in late 2021. The downward slide in bitcoin prices was a function of several factors, including the rise in the US dollar and issues related to the cryptocurrency industry. The blowup of FTX, and the alleged fraud by its CEO Sam Blankman-Fried, continue to weigh on cryptocurrencies and how safe cryptocurrency exchanges are for investors. To add insult to injury, the Commodity Futures Trading Commission filed a lawsuit against Binance and its founder Changpeng Zhao alleging that the company provided an unregistered cryptocurrency derivative to retail investors, which is a violation of US Federal law. While many issues with trading cryptocurrencies continue to provide a wall of worry, there are several reasons why conditions for cryptocurrencies to thrive remain intact.
Why Did Bitcoin Sell-Off?
There were several reasons why the cryptocurrency complex, including Bitcoin, sold off from its highs in late 2021. The rise in US interest rates and the strengthening of the US dollar catalyzed the initial decline. The dollar is considered one of the global benchmarks. It is viewed as a reserve currency that central banks own globally.
Bitcoin and other cryptocurrencies have an inverse relationship with the US dollar. The dollar is the most commonly traded fiat currency as an exchange rate versus bitcoin. The correlation between the dollar and bitcoin using weekly data points beginning in 2018 is approximately 70%. Correlation is a statistical measure oscillating between -100% and 100%. When two assets are correlated at 100%, the returns of the prices move in tandem with each other. When the correlation is at -100%, the returns of the prices are moving in opposite directions. A zero correlation means there is no observable pattern of the movement of the returns.
As the Federal Reserve clarified that they would need to increase interest rates to fend off rising inflation, the dollar rose versus most major currencies and cryptocurrencies. As the dollar rose, the downward pressure was placed on bitcoin.
Another issue that pushed bitcoin lower in the late fall of 2022 was the bankruptcy of FTX. FTX is a cryptocurrency exchange that provides investors a place to store and trade cryptocurrencies. FTX filed for bankruptcy due to a combination of factors and a decreased ability to access capital. Additionally, the company had been struggling with debt and could not restructure it in a way that would have allowed it to remain solvent. The main issue surrounding the collapse of FTX was that its CEO and several employees were speculating on the direction of cryptocurrency in a hedge fund called Alameda Capital. The fund used customer money in FTX as collateral for trades, which eventually unwound as investors withdrew money from FTX.
Why Are Cryptocurrencies Rebounding?
After declining rapidly in the late fall of 2022, bitcoin found a bottom. In early 2023, cryptocurrencies started to rally. Some of the gains were due to issues that began to occur in the U.S. banking sector. As investors started to become concerned about the ability of their banks to remain solvent, deposits started exiting smaller regional banks and moving into larger banks, as well as bitcoin. Consumers whose uninsured deposits have burned are asking the question, what is crypto trading?
The first shoe to drop was the bankruptcy of Silicon Valley Bank. SVB Financial Group filed for bankruptcy in 2023 due to a run on its deposits. As the Federal Reserve increased interest rates, the bonds that SVB held in its portfolio started to decline in value. If SVB could hold on to the bonds to maturity, they would receive all of their capital and interest back, but because they needed to mark the treasury securities to market, they needed to report a huge loss. Once the losses were recognized, its common stock price plummeted, and customers rushed to withdraw deposits. The company could not secure additional capital to cover its losses and filed for bankruptcy. The episode at SVB showed that some banks did not have the money to withstand a run on a bank.
The scare increased the demand for another form of value which helped buoy bitcoin. There are several unknowns about the issues related to the banking sector. What was clear from the collapse of SVB and Signature Bank in New York was that neither bank was hedging its interest rate portfolio, and when the Fed started to raise rates, each company was caught off-guard, leading to the failure of each company.
Two possible situations make cryptocurrency attractive in the future. What was clear from the recent bankruptcy of SVB and Signature Bank is that holding money in a bank can be riskier than many people thought. While in the United States, a depositor is protected under the Federal Deposit Insurance Company Act up to $250,000, for those who have more and want to have their money in a liquid asset like cash, a bank deposit can incur risks. It’s not only small banks that can be at risk. In March 2023, Credit Suisse Bank was in trouble and needed to be rescued by the Swiss government and UBS. UBS had a minimal choice but to take over the troubled Swiss bank. A plethora of problems led to depositors withdrawing capital to the point where Credit Suisse could no longer fund its operations and needed to be rescued.
The lack of insurance plays a more significant role for companies that use banks to fund payrolls. If you are a company, you likely have more in your bank account than $250,000, and this is all that would be protected if your bank files for bankruptcy. This process will not work smoothly unless a business is willing to open several accounts across multiple banks. Handling your company in this fashion is likely to be arduous, demanding, and inefficient.
Has the Down Trend Bottomed?
One of the ways you can tell if the trend in Bitcoin has hit bottom is to evaluate the moving averages that make up the daily, weekly, or monthly price movements. A moving average is the average of certain prices over time. For example, if you want to evaluate the 10-week moving average, you would average the price over the past ten weeks. You will remove the first week from the averaging period when a new week is added. A moving average is a widely used technical indicator in the analysis of financial markets. It is a trend-following, or lagging, indicator based on past prices. The moving average is a powerful visual trend-spotting tool once plotted on a chart. Moving averages make it easier to locate trends and potential support and resistance levels.
A moving average crossover is one of the best ways to evaluate a trend. It is a trading strategy that uses two different moving averages to identify a trend in the price of a security. When the shorter-term moving average crosses above the longer-term moving average, it is a signal to buy. Conversely, when the shorter-term moving average crosses below the longer-term moving average, it is a signal to sell.
The Bottom Line
There are likely several reasons why conditions for cryptocurrencies to thrive remain intact. Some issues that generated the massive selloff are likely in the rearview mirror. The huge rally in the US dollar is probably nearing the end as the Federal Reserve is closer to ending the tightening cycle to fend off inflation at the beginning of the cycle. Since most of the traded Иitcoin is versus a fiat currency like the dollar, a stable or lower dollar will likely buoy bitcoin and other cryptocurrencies.
Another issue that has provided insight into the value of cryptocurrencies is the banking solvency in the United States. With SVB and Signature Bank declaring bankruptcy, there is concern amongst depositors that their bank accounts are unsafe. Lastly, the downtrend in Bitcoin appears to be coming to an end. In evaluating the moving average crossover, a medium-term up price trend seems to be in place.
Disclaimer: The opinions and views expressed in this article are solely those of the author and are not necessarily shared by Coinspeaker. We recommend you conduct the necessary research on your own before any investment and trading move.