Why Bitcoin, Ethereum and Dogecoin are rising this morning

What happened

Several cryptocurrencies jumped higher today in a move that appears to be linked to ongoing struggles in the banking system, specifically at First Republic (FRC -22.47%)which recently reported its first quarter results.

Since late yesterday afternoon, the world’s largest cryptocurrency, Bitcoin (BTC -0.01%), traded nearly 7% higher from 10 ET today and was hovering around $29,850. The world’s second largest cryptocurrency, Ethereum (ETH -0.01%)traded 5.4% higher, while the meme token Dogecoin (DOGE -0.01%) was up 4.6 percent.

So what

Bitcoin had struggled in recent days but appears to be benefiting from First Republic issuance after the bank on Monday reported first-quarter earnings that showed it had lost $100 billion in deposits.

The outflows were more than expected and leave the bank in a tight position with few good options. There is a chance that other major banks will try to find a way to help the bank reduce its balance sheet or buy the bank, because the failure of First Republic would result in a further hit to the Federal Deposit Insurance Corporation (FDIC) Deposit Insurance Fund.

Big banks are already facing a huge strain to replenish the fund after the collapse of the Silicon Valley Bank and Signature bank, so they don’t want to have to pay more for First Republic if possible. This could reportedly involve major banks buying some of First Republic’s underwater assets at a higher price than they are actually worth, putting the bank in a better position to shrink its balance sheet.

But even if First Republic is saved, it looks like the bank has a long road ahead of it. And Bitcoin and other cryptos have shown a tendency to do well when the banking system struggles because cryptocurrencies were developed as an alternative to the mainstream financial system. Bitcoin and most other cryptocurrencies rallied in March as the banking crisis unfolded.

In a research note yesterday, Yuya Hasegawa, an analyst at crypto exchange Bitbank, wrote: “Bitcoin may continue Tuesday’s rally in the short term, but it is too early to say it has bottomed. Its old resistance around $28,800-$29,000 could be a tough ceiling to break ahead of Friday’s US PCE [Personal Consumption Expenditures] announcement.”

What now

If this recent rally is indeed tied to bank fights, I don’t see it as a long-term catalyst for crypto because I think First Republic is now more or less a one-time factor in the banking system.

Bank income has mainly shown stability, not that there won’t be earnings struggles. Other banks that were closely monitored, such as western alliance and PacWest Bancorphave actually also rallied on their income reports.

I think the macro environment is much more important this year to the trajectory of Bitcoin and the broader crypto market, as Hasegawa wrote. A continuation of slowing inflation followed by a pause in interest rate hikes by the Federal Reserve and a weakening of the dollar will be more beneficial for cryptocurrencies.

I think a Fed pause is likely sooner rather than later, and I continue to like Bitcoin and Ethereum as long-term investments that deserve at least some exposure in your portfolio. I also continue to have no interest in Dogecoin.