Bitcoin hit a nine-month high on Friday as crypto traders moved funds away from banks and warmed to rapidly changing interest rate expectations.
The dollar-denominated price of the original and largest crypto coin has risen more than 30 percent this week to more than $27,000, the highest point since the crisis of confidence that engulfed the market last summer. The second largest token, ether, has risen fivefold in the same period.
Buyers have emerged after a week of acute turmoil for the world’s banking industry on both sides of the Atlantic as investors are concerned about the valuation of bond portfolios and the business models of small banks.
The US government and big banks stepped in to stabilize the system while the Swiss central bank provided a $54bn emergency backstop to creditor Credit Suisse. The uncertainty has fueled speculation that the Federal Reserve and the European Central Bank will pause plans to raise interest rates aggressively to curb persistent inflation.
For the past 18 months, the price of bitcoin, once touted as a hedge against inflation, has often been linked to traditional stock indexes such as the S&P 500 and Nasdaq Composite, and is sensitive to traders’ expectations about interest rates.
Traders say that when investors fear the price of crypto, they move their funds to bank deposits and stablecoins. When there were concerns about the bank, they quickly moved to buy tokens.
“Fears for the stability of the banking system, together with the reduction of real interest rates, create a favorable environment for bitcoin to rebound as it is seen by some investors as a hedge against systemic risk,” said Ilan Solot, co-head of digital assets. in London broker Marex.
The market recovery has also been supported after assurances from the US authorities that deposits in the failed Silicon Valley Bank will be protected.
Circle, the second largest USDC stablecoin operator in the crypto market, admitted that $3.3 billion was trapped in SVB, causing a temporary drop in the value of the stablecoin to 88 cents.
Stablecoins act as a conduit between crypto and national money and are supposed to maintain a one-to-one value against the dollar at all times.
Despite the short-term recovery for digital assets, the turmoil in the banking sector casts doubt on the long-term footprint of the crypto industry in the US.
Along with Silvergate and Signature, SVB is one of the tripartite crypto-friendly banks that have died in recent times. The failure has fueled 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 is deliberately seeking to limit the banking industry’s exposure to the crypto market.
“A lot of people already know that this industry revolves away from the United States, so in many ways, the American crypto clampdown has been priced in by the market,” Solot said.