Could the Silicon Valley banking crisis end the crypto winter?

Following the collapse of Silicon Valley Bank, markets are predicting that the Federal Reserve will take a softer approach to raising interest rates, a potentially hopeful sign for cryptocurrencies that have been hammered by a tightening economy.

The Fed began an aggressive campaign to curb inflation a year ago when it lifted interest rates from near zero last March. Now that interest rates are resting between a target range of 4.50% to 4.75% and the US banking sector is showing signs of stress, the chances of the Fed pushing rates have decreased.

The chance that the Fed will raise interest rates by 50 basis points at its meeting next week fell from 40% on Friday to 0%, according to CME FedWatch Tool. The probability that the Fed will pause rate hikes has since shot up to 34% from 0%.

Although Fed Chairman Jerome Powell has signaled that interest rates will remain high until US inflation is well on its way to 2%, ING Bank chief international economist James Knightley said. Decrypt the central bank’s stance will probably become cautious.

“If there is a situation that warrants it, they will change their view very, very quickly,” Knightley said. “What we have now is a situation where we can be on top, potentially, right now.”

If interest rates have peaked, a change in the Fed’s monetary stance could cause investors to allocate more money to risk assets such as stocks and crypto. Higher interest rates have made risky assets less attractive compared to conservatives like U.S. Treasuries, which have seen their yields trend upward as the Fed tightens.

Any increase in liquidity will be beneficial for crypto markets, digital asset and information services provider Kaikos told Dessislava Aubert. Decrypt. Fed newly established The BTFP facility – which offers loans to banks as a source of liquidity – will also benefit risk assets, she said.

Cryptocurrency prices rose on Monday as markets recalibrated expectations of future Fed rate hikes. Bitcoin rose 13.5% to around $24,280 and Ethereum rose 8.1% to just over $1,680, according to CoinGecko data.

Knightly said the failure of Silicon Valley Bank last week was clearly a sign of stress that has materialized as a result of interest rate hikes, reverberating comments made by US Treasury Secretary Janet Yellen on Sunday.

The Fed Futures markets are predicting that the US Federal Reserve is likely to start cutting interest rates at some point in the near future, with just a 7% chance that rates will be at current levels or higher by the end of this year.

But there is still a chance the Fed could decide to raise interest rates at its board meeting next week if tomorrow’s inflation reading comes in above expectations, Knightley said.

When the Fed tries to cool the economy and bring down inflation by making it more expensive for businesses and consumers to borrow, it risks tipping the economy into recession by tightening too much or too quickly.

“When you raise interest rates so aggressively, eventually something will break, and I think we’re starting to see that,” said CoinShares investment strategist James Butterfill Decrypt.

Butterfill said a change in the Fed’s monetary stance supports Bitcoin as the central bank focuses more on market stability than tightening the economy. He said a sense of uncertainty around central banks is beneficial for Bitcoin as well, as the US government tries to calm fears of contagion from the collapse of Silicon Valley Bank.

“It remains unclear whether they have been able to stop the crisis of confidence at the moment and as a consequence I think [the price of] Bitcoin is doing really well, he said. “It runs from investors’ distrust of the banking system.”

But whether or not the crypto winter may thaw is not certain given the regulatory headwinds facing the digital asset industry, Butterfill said. Just last week, the New York Attorney General’s office claimed Ethereum is a security as it announced a lawsuit against cryptocurrency exchange KuCoin.

And the collapse of crypto-friendly banks Silvergate and Signature has also raised concerns about the ability of firms native to the digital asset industry to establish banking partnerships.

Last month, the Bureau of Labor Statistics (BLS) said consumer prices rose 6.4% in the twelve months to January, according to the Consumer Price Index (CPI), which tracks price changes across a basket of goods and services.

The report indicated that inflation eased for the seventh consecutive month from inflation’s 41-year high of 9.1% in June.

While the collapse of Silicon Valley Bank has overshadowed tomorrow’s reading, it could still factor into the Fed’s path forward if the report shows signs of stubborn inflation, Ameriprise Financial Services chief economist Russell Price said. Decrypt.

“To some extent it has kind of pushed the CPI report into the background a little bit,” he said. “But if we got data that showed that inflation is much stickier or stubborn, and not continuing its deceleration path as in the past, then that could complicate matters.”