Bitcoin is headed for its third positive up month, best quarter since 2021

Bitcoin is about to post its third consecutive positive month and best quarter in two years after navigating its first bank meltdown and another regulatory breach, as investors weighed the possibility of a new interest rate environment.

The largest cryptocurrency by market cap has extended its 2023 rally and is about to end the month up more than 22%, which would bring its annual gain to more than 72%. It would also be bitcoin’s best quarter since the first quarter of 2021 – which marked the beginning of a major bull run at the time.

“The rally has continued in March even after recent bank closings,” said Jeff Cantwell, an equity analyst at Wells Fargo. “While the decline has more than one underlying cause, our conversations with investors have centered around three: crypto as a ‘flight to safety’ given banking turbulence; positioning (short covering); and a shift ‘on the margin’ by investors to ‘risk on’ as the prospect of a Fed pivot has increased.”

On Friday, bitcoin pushed up 2% at one point to retake the $28,000 level, which it first breached earlier this week for the first time this year. It had fallen back amid a knee-jerk reaction from investors on the latest crypto crackdown by US regulators, the CFTC’s lawsuit against Binance.

Bitcoin came off a flat February but climbed through March as investors rediscovered its appeal as an alternative banking system amid a global banking crisis. Even after the two most crypto-friendly banks, Silvergate and Signature Bank, closed, bitcoin surged. However, they brought key on- and off-roads between fiat currency and crypto, and Cantwell said he expects that to affect liquidity in crypto until new entrants fill the gap.

Investors also shrugged off the “unhealthy regulatory environment” that persisted throughout March, as dire regulators still recovering from the FTX fiasco descended on Coinbase and Binance, after coming for Kraken last month.

Having spent much of the past two years trading in lockstep with stocks, this correlation is now at its lowest since September 2021, while the correlation with gold, a traditionally “risk-off” asset, has risen.

“Bitcoin still appears to be in a favorable light, but only if growth also stays healthy,” said Callie Cox, analyst at investment firm eToro. “A recession could still push crypto prices considering it’s still such a retail-dominated asset and high prices are still an obstacle.”

At its meeting in March, the Fed raised interest rates by another quarter of a percentage point, but indicated that the hike campaign could soon be over. Some traders now expect the Fed to keep its benchmark interest rate at current levels, with some forecasting lower rates as early as July, according to CME Group’s FedWatch tool. That could remove a major macro headwind for crypto.

“The banking news narrows the gap for a soft landing, increasing the chance of seeing an extreme scenario in either direction,” Cox said. “For now, it’s anyone’s guess how crypto will withstand an extreme scenario – a recession or sustained high inflation.”

“We’re also seeing signs of some buying fatigue — flows out of crypto exchange-traded products, poor reactions to good news,” she added. “Crypto investors should still tread carefully. Bitcoin’s strong run this year isn’t necessarily a green light to pile back in.”