Market Byte: Bitcoin is Up. Why?
Matt Maximo
Michael Zhao
The market currently expects the Fed to slow their pace of rate hikes, and expects a 25 bps increase versus the 50 bps (or more) which would be consistent with rate hikes in 2022. Given the relationship between interest rates and asset prices, we expect that a lower-than-expected hike tomorrow could result in a rally for risk assets — like Bitcoin, in particular. Should this outcome play out, we could reasonably experience a short-term positive price impact on Bitcoin and possibly the broader crypto market.
Bitcoin may be less directly impacted in a scenario where the Fed maintains its commitment to aggressively raising rates. However, we believe Bitcoin’s unique ability to act as a safe haven asset may still allow the digital asset to capture upside.
Figure 3: Consolidated Domestic US Bank Assets
Source: Federal Reserve Statistical Release as of 12/31/2022
Figure 4: Correlations; Bitcoin & SPX Index and Bitcoin & Gold
Source: CoinMetrics, Yahoo Finance. 4/21/2022 to 3/21/2023 14D rolling correlation
Bitcoin was created in 2008 during the Great Financial Crisis with, amongst other aims, a mission to protect people against the fractional reserve banking system. Bitcoin was designed to serve as a self-sovereign and digitally native currency in the growing digital economy. The initial ethos and value of Bitcoin appears to be resonating with investors now more than ever, in particular, those who may be seeking an alternative during this moment of uncertainty and instability with the traditional banking system.
[1] Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.
[2] CoinMarketCap as of 3/21/2023
[3] Glassnode. 3/10/2023 to 3/20/2023
[4] The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.
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