Bitcoin’s rally is on again. The reason why Tuesday’s CPI data is a risk.
The rally in
Bitcoin
and other cryptocurrencies are back, with digital assets roaring higher despite widespread fear across financial markets in recent days. The main reason also suggests that important economic data on Tuesday is a big risk.
The price of Bitcoin has risen 10% in the past 24 hours to over $24,300 – levels the biggest digital asset has not seen since mid-February. Bitcoin surged to a peak above $25,000 last month from around $16,500 in early January, but its gains stagnated in March and saw the crypto fall below the $20,000 level last week amid concerns over crypto banks and the regulatory picture. The latest price action suggests that Bitcoin is back on a bullish streak. But for how long?
In the past week alone, Silvergate Capital (ticker: SI) and Signature Bank (SBNY) – the most influential US bankers for the crypto industry – have failed, a headwind that bodes ill for market liquidity as well as sentiment for digital assets among regulators. Then, amid banking troubles at Silicon Valley Bank, traders faced deep fears about how deposits with that lender could threaten the viability of a key stablecoin.
And yet, Bitcoin has managed to jump higher in the face of these headwinds.
It is more likely that the rise in cryptos is due to the nature of the correlation between digital assets and stocks – although
Dow Jones Industrial Average
and
S&P 500
largely faltered on Monday while Bitcoin rallied.
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Both crypto and stocks remain highly sensitive to the macroeconomic backdrop of rising interest rates. And the crisis in US banks – largely a function of losses on bond holdings as a result of higher interest rates – has prompted soul-searching for expectations about future monetary policy. In a week, markets have gone from expecting the Federal Reserve to step up to a major rate hike of 50 basis points this month to pricing in a good chance the central bank will keep interest rates unchanged because of banking problems.
That’s a big tailwind for cryptos, which are even more price-sensitive than the solid stocks of the Dow and S&P 500. Tech stocks are heavy.
Nasdaq Composite,
which is even more closely tied to Bitcoin, was the only one of the three major indices to see gains on Monday – driven by the exact same force of shifting macro expectations.
But this is a risky setup for Bitcoin for Tuesday, with the February reading of the Consumer Price Index (CPI). The CPI is a key measure of inflation, and several decades of high inflation is what has driven the Fed to raise interest rates in the past year.
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Bitcoin’s recent outperformance of stocks is not a sign that it has put macro concerns behind it, but rather an indication of how sensitive cryptos remain to the macro picture. While markets firmly expect the Fed to be more accommodative given the recent turmoil in the banking sector, a red-hot CPI print has the potential to upend those expectations or at least solidify a rate hike of some kind next week.
Beyond Bitcoin,
Ether
— the second largest crypto growth by 6% to $1,670. Smaller tokens or altcoins were also buoyant, too
Cardano
climbing 3% and
Polygon
4% higher. Memecoins were also in the green, with both
Dogecoin
and
Shiba Inu
up 3%.
Write to Jack Denton at [email protected]
