Could This Bitcoin Rally Finally Have Endurance?

Wall Street put the wind at its back on Tuesday, with investors finally deciding they had seen enough bad days in a row. With futures contracts for Dow Jones Industrial Average (^DJI 0.00%), S&P 500 (^GSPC -1.03%)and Nasdaq Composite (^IXIC 0.00%) up between 1% and 2%, the major market indexes looked set for a good morning after the S&P hit new 2022 lows in late trading on Monday.

Bitcoin (BTC 6.31%) also roared back over $20,000 after seeing intense pressure recently, and many other digital asset and cryptocurrency stocks posted significant gains. Yet with Bitcoin and Ethereum (ETH 5.94%) still significantly down from their respective 2021 highs, the unanswered question is whether Tuesday’s rally will finally be the one to end the wintry mood in the crypto markets – or simply fizzle out like so many other rebound attempts have in recent weeks.

What’s happening in crypto?

Bitcoin’s 7% gain to around $20,250 was representative of movements across many digital assets. Ethereum also rose more than 7%, challenging the $1,400 mark for the first time in more than a week. Solana and Chain link were up 7% and 9% respectively, while Uniswap led the way higher among major digital assets with an 18% jump.

Stocks tied to the success of cryptocurrencies also fared well in premarket trading on Tuesday morning. Coinbase Global picked up more than 6%, while mining companies Marathon Digital Holdings and Riot Blockchain increased by 8% and 7% respectively. Software company Micro strategywhich is better known for its high balance sheet exposure to Bitcoin than its core business, rose nearly 6% on Tuesday morning before the regular trading session began.

The US dollar takes a breather

Many cryptocurrency watchers saw the performance of the US dollar as the main reason for the rally in Bitcoin and other digital assets. Investors have grown increasingly concerned about the pace at which the US dollar has strengthened against major foreign currencies, particularly the British pound, which fell to multi-decade lows earlier this week.

At least for today, the greenback took a breather. The pound gained more than 1% against the US dollar, rising to $1.08. The euro rose slightly but remained below parity, fetching $0.965.

Still, it’s important not to overstate the role that currency markets can play in holding back cryptocurrency values. Even when you measure Bitcoin’s value in British pounds, for example, the price of the leading digital asset has still fallen by well over half from its peak in late 2021.

When will crypto really go higher?

In the short term, political tactics designed to slow the pace of market movements can stop the decline in asset prices, whether in stocks, currencies or cryptocurrencies. Over longer periods, however, macroeconomic factors will continue to play an important role, and that is where investors face the greatest uncertainty right now.

At least to date, however, digital assets such as Bitcoin have proven to be disappointingly correlated with the higher growth end of the stock market. Just as higher interest rates have called into question how well smaller, more speculative companies will be able to attract the necessary capital to fuel future growth, they have also made cryptocurrency investors more cautious about focusing on fundamentals rather than the high-flying trading cars gearing. which drives so much of the volatility in the crypto markets.

These correlations could benefit Bitcoin if equity markets make a sustained pullback from current levels. But in the long run, if Bitcoin wants to reach its full potential, it will have to prove its continued status as a completely different asset class with the ability to outperform regardless of what other markets do. That was largely the case early in Bitcoin’s history, but skeptical investors need to see it happen again to regain confidence in the digital asset markets.