Fed Starts ‘Stealth QE’ – 5 Things to Know in Bitcoin This Week
Bitcoin (BTC) begins another week with a bullish rise above $22,000 as the Federal Reserve injects liquidity into the US economy.
In a move that rivals any classic Bitcoin comeback, BTC/USD is up a whopping 15% from the two-month lows set on March 10.
The volatility – and at least temporary relief for bulls – is all due to events in the US following the failure of one bank and the forced shutdown of another’s operations.
Silicon Valley Bank and Signature Bank are the latest victims of a brutal year for financial institutions under the Fed’s rising interest rates — will the trend continue?
Despite Signature being crypto-focused and a major push from fiat, crypto markets have so far seen no reason to abandon optimism at the prospect of the Fed supplying new money.
However, not everyone believes that this constitutes a “pivot” on interest rate increases or overall policy.
As the dust continues to settle and news pours in from the ongoing events, Cointelegraph breaks down the main factors moving the BTC price in the short term.
Fed bails out Silicon Valley Bank depositors
The story of the moment is of course the fallout from Silicon Valley Bank (SVB) which failed late last week.
Swallowing hundreds of billions of dollars in deposits, SVB was forced to take a whopping $1.8 billion loss thanks to parking consumer funds in mortgage-backed securities, whose rates were also hurt thanks to the Fed’s rate hikes.
A snowball effect soon began as depositors became wary that something might be wrong in terms of liquidity. Everyone tried to withdraw from SVB at once and the funds were unavailable, necessitating the sale of assets at a loss and an emergency financing round that ultimately failed.
The result has come in the form of the Fed stepping in to freeze depositors’ money. On March 12, it announced the “Bank Term Funding Program” (BTFP).
“Depositors will have access to all their money starting Monday, March 13,” confirmed an accompanying joint statement from the Treasury Department, the Fed Board and the Federal Deposit Insurance Corporation (FDIC).
“No losses associated with the dissolution of Silicon Valley Bank will be borne by the taxpayer.”
@federalreserve @USTreasury @FDICgov Issue Statement on Actions to Protect the American Economy by Strengthening Public Confidence in Our Banking System and Ensuring Depositors’ Savings Remain Safe: https://t.co/YISeTdFPrO
— Federal Reserve (@federalreserve) March 12, 2023
As market commentators were quick to point out, the decision actually marks a return to the Fed’s liquidity injections – quantitative easing (QE) – while previously liquidity was withdrawn from the US economy.
Risky assets immediately rose on the news, as increasing liquidity ultimately increases investor risk appetite.
Crypto was no exception, despite US authorities announcing the sudden closure of Signature Bank in a move that some claim was a direct attempt to stop crypto markets exploiting the SVB aftermath.
“We are also announcing a similar systemic risk exemption for Signature Bank, New York, New York, which was closed today by the State Chartering Authority. All depositors of that institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer ,” said the same joint statement.
Popular commentator Tedtalksmacro reacted to the creation of the BTFP, describing it as a form of “stealth QE”.
“Unofficial quantitative easing begins on Monday. This is so bullish,” part of subsequent Twitter posts added.
“TL;DR The Fed’s balance sheet will expand and that will increase USD liquidity.”
As Cointelegraph reported, crypto as a whole is highly sensitive to central bank liquidity trends — and not just those in the US
Among those emphasizing this is Arthur Hayes, former CEO of derivatives exchange BitMEX, who spelled out in a blog post earlier this year how changing liquidity conditions are likely to affect Bitcoin and altcoin performance.
Now he was strikingly bullish.
“Get ready for a jaw-dropping rally in risk assets. THE CASH REGISTER GO BRRR!!!” he told Twitter followers about BTFP in one of several posts on March 12.
Speculation is gathering about a “pivot” in the Fed interest rate
With liquidity returning to the market, it wasn’t just crypto wondering the fate of the Fed’s quantitative easing (QT) policy in place over the past 18 months.
Speculation was rife that day that this month’s decision on interest rate adjustments could result in either a reduction or the Fed leaving the current rate unchanged.
Earlier, markets had hovered between a 0.25% and 0.5% increase to the benchmark interest rate at the March 22 meeting of the Federal Open Market Committee (FOMC).
“Given the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” Goldman Sachs economist Jan Hatzius wrote in a March 12 note cited by CNBC and others.
David Ingles, head of marketing at Bloomberg TV, interpreted the comments when Goldman rated the CPI a “non-event”.
Cointelegraph contributor Michaël van de Poppe, founder and CEO of trading firm Eight, looked closer to home, noting that the coming week would produce another price catalyst in the form of February’s Consumer Price Index (CPI) inflation data.
“‘QE’ and ‘Bailout’ for the banks, meaning temporary relief + potential good CPI and no more rate hikes (or 25bps) is fuel,” he wrote as part of Twitter comments on March 13.
“Markets now await CPI to give green light,” popular trading and analysis account Daan Crypto Trades continued.
“If CPI comes in hot, we’ll see some chaos as we basically want a rising CPI + Easing Fed. If CPI comes in below estimates, I don’t see any reason for the market to hold back.”
More cautious was Alasdair Macleod, who, in light of the BTFP decision, cautioned against assuming the Fed had abandoned QT for good.
“The initial market reaction to the banking crisis is based on perceived Fed pivot. But this could be a mistake,” he says tweeted.
“Regardless of the Fed’s monetary policy, the closing of bank credit forces up the price of loans, if you can get one. Watch the money markets!”
According to CME Group’s FedWatch Tool, general expectations still favored a further hike rather than a stagnant benchmark rate on March 22. However, 0.5% was off the table.
BTC price jumps to $22.7,000 in a fierce comeback
With that, Bitcoin was in a clear bullish mood during the March 13 Asia trading session.
Ahead of the Wall Street open, BTC/USD was trading at around $22,100 at time of writing, after hitting local highs of $22,775 on Bitstamp, according to data from Cointelegraph Markets Pro and TradingView.
The bulk of the recovery from its March 10 low below $20,000 came after the Fed’s liquidity announcement, but this still erased any trace of the SVB implosion.
“Bitcoin Recovered From Biggest US Bank Collapse Since 2008…in Just 3 Days,” Popular Commentator Bitcoin Archive in summary.
Among traders, targets remained mixed as volatility continued to move BTC/USD up and down ahead of the open.
Van de Poppe argued that $21,300 must hold to facilitate a long trade, but this could still reach $23,700.
“22.7K liquidity looks ripe,” Crypto Chase trades continued.
“For all local longs, stops below 21K should be safe IMO. Back below wouldn’t make much sense to me if this is going to keep tearing.”
Full time trader Jackis meanwhile noted that last week’s low had exactly matched the 0.618 Fibonacci retracement level from the 2023 highs above $25,000.
“No surprise we’re pumping out huge monthly support,” Credible Crypto added on current price behavior on 4-hour timeframes.
Bitcoin’s weekly close thus came in far higher than expected at more than $22,000. For trader and analyst Rekt Capital, this “probably” put pay to the bearish double top pattern that previously played out on weekly time frames.
“Weekly close above $21770 likely invalidates Double Top,” part of a March 12 tweet read.
However, further analysis gave April as the closest point that Bitcoin could start to effect a long-term trend change.
“Great BTC Reaction from ~$20000, Range Low of this Macro Range,” Rekt Capital wrote.
“As long as ~$20000 holds, $BTC has a chance to challenge the macro downtrend in the coming weeks again, April at the earliest.”
USDC looks set to regain $1 peg
In what may have investors breathing a sigh of relief this week, an early crypto crash from the SVB implosion was back in action on March 13.
USD Coin (USDC), the second largest stablecoin by market cap, had practically regained its peg to the US dollar at the time of writing.
After falling 20% earlier, USDC traded at $0.99 on Bitstamp, as assurances from issuer Circle helped calm existing panic.
In a Twitter thread On March 12, CEO Jeremy Allaire confirmed that BNY Mellon and an unnamed new banking partner would take over from where Signature and SVB, which swallowed over $3 billion of its reserves, abruptly left off.
“Trust, security and 1:1 redeemability of all USDC in circulation is of utmost importance to Circle, even in the face of banking contagion affecting the crypto markets,” he added in a press release, praising the actions of the Fed and US lawmakers.
Largest US exchange Coinbase meanwhile confirmed that USDC conversions would begin on March 13.
“Despite the turbulence we’ve seen in the traditional banking sector recently, Coinbase continues to operate as usual. At Coinbase, all client funds continue to be safe and accessible, including USDC conversions which will resume on Monday,” it tweeted.
Other major stablecoins that had loosened in tandem with USDC also tried to regain their dollar pegs, with Dai (DAI) at $0.989 and USDD (USD) at $0.986 respectively.
Given the changes in stablecoins and banks, #Binance will convert the rest of the $1 billion Industry Recovery Initiative funds from BUSD into native crypto, incl #BTC, #BNB and ETH. Some fund movements will occur on the chain. Transparency.
— CZ Binance (@cz_binance) March 13, 2023
Changpeng Zhao, CEO of largest global exchange Binance, additionally announced the conversion of some of its own stablecoin, Binance USD (BUSD) to Bitcoin, Ether (ETH) and its internal Binance Coin (BNB) as part of its existing “Industry Recovery Fund.”
“With almost $1 billion untapped, this means the market will soon have extreme buying pressure,” part of a reaction from data scientist on the chain The Data Nerd read.
Sentiment is picking up as the risk of a “short squeeze” increases
Reflecting the extent to which crypto market sentiment remains extremely sensitive to macro events, the Crypto Fear & Greed Index returned to “fear” for the first time in two months on March 10.
Related: Watch These 5 Cryptocurrencies for a Potential Price Bounce Next Week
Recent events saw a dramatic turnaround, with the index’s score from 33/100 to 49/100 – classified as “neutral” – in a single day.
However, bearishness remains on derivatives exchanges. Over the weekend, funding rates reached their lowest since the aftermath of the FTX implosion in November 2022, data from research firm Glassnode in the chain shows.
“Longs get paid to be long,” Tedtalksmacro in summary.
Excessively negative funding rates have the ability to trigger a “short squeeze” – an event where shorts are liquidated en masse in a cascading domino effect as the market majority expects the price to continue to fall.
Cross-crypto short liquidations already totaled more than $150 million on March 12 alone, according to data from Coinglass, with the March 13 figure at $39 million.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
