The Link Between Banking Instability and the End of Crypto Winter: A Closer Look

The Link Between Banking Instability and the End of Crypto Winter

Amid the banking crisis and market uncertainty, Bitcoin surpassed the price level of $26,000 and surprised many investors with its continued upward trajectory. Despite expectations of significant selling pressure, the cryptocurrency market saw a price surge that left many wondering what could have caused this sudden bullish trend. So, the question is, what led to the bullish momentum in the overall crypto market, and is it finally the end of crypto winter? 

Federal Reserve Forced to take Softer Approach. 

One positive consequence following the collapse of Silicon Valley Bank is that the markets are now predicting that the Federal Reserve will have a softer approach when it comes to raising interest rates under inflation-controlling measures. The Fed has been trying to tame inflation by lifting interest rates from near zero since March 2022. The current interest rates lie between a target range of 4.50% to 4.75%. At the same time, the banking sector of the U.S. has started signs of stress with the collapse of Silicon Valley Bank and Signature Bank. 

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For those unaware of the theory of why the rise in interest rates led to the collapse of these banks, here’s a short brief. There is an inverse relationship between the interest rates and the value of bonds. Hence, whenever the fed increases these interest rates, the value of bonds tends to decrease. This had caused a cascading effect on these banks as they had bought the bonds when the interest rate was almost zero. That scenario has also been termed the phase of quantitative easing. 

Having said that, if the Fed keeps increasing the interest rate, more regional banks in the U.S. might face financial turbulence. Therefore, the Federal Reserve is expected to take a softer approach to increase the interest rate. According to the CME FedWatch tool, the probability of the Fed raising interest rates by 50 basis points at its meeting next week has dropped from 40% on Friday to 0%. The Fed’s likelihood of pausing interest rate hikes has risen from 0% to 34%.

What does it mean for the cryptocurrency market? 

It’s pretty simple. In the past, the continuous hike in the interest rate has made conservative investment assets like U.S. Treasury bills a more attractive option for investors. Now that the expectations of interest rates are becoming stagnant, we can expect a shift in the allocation of investment funds to risk assets such as stocks and crypto. 

This particular expectation and assumption might have led to the surge in the price of several cryptocurrencies. BTC is up by 12.23% weekly, whereas Ethereum is up by 9.17% for the same duration. This monetary stance supports Bitcoin as the central bank focuses more on market stability than tightening the economy.  

Inflation Still A Pivotal Point 

All the assumptions and expectations based on the current move might flush down the drain if the inflation reading comes above expectations later this year. In that case, the Fed could raise interest rates making it more expensive for businesses and consumers to borrow. After setting a 41-year high of 9.10% in June 2022, inflation has shown signs of easing. Still, it remains far above the Federal Reserve’s target of 2%. That also means we could expect a pullback in the cryptocurrency market too.  

Overall, we are standing at a pivotal point. The current positive momentum of the crypto market cannot be considered a long-term prospectus, especially when it is receiving regulatory crackdowns and pressure from regulators globally.  

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