The 3 key factors behind the crypto bull market’s swift return

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2023-03-25 at 14:18 #397745
Nat Quinn
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As the dust settles on the second-largest banking failure in US history, the cryptocurrency market seems to be one of the only investment classes delivering strong positive returns. Bitcoin had its best weekly return since 2017 last week (up +26.28%), and the rest of the cryptocurrency market is now following suit.

So, what has caused the cryptocurrency market to react so positively in recent weeks?

Here are 3 reasons why the crypto bull market may have returned sooner than expected.

1. The Silicon Valley banking crisis shines a light on the fragile US Banking system

What happened?

The Federal Deposit Insurance Corporation (FDIC), which guarantees customer bank deposits, closed Silicon Valley Bank’s (SVB) doors on Friday, March 10th, after a dramatic few days in which the bank’s customers rushed to withdraw their deposits amid rumours that the bank’s financial position was in jeopardy due to losses on its government bond holdings.

What does this mean?

A bank’s business is to take customer deposits and loan some of them out to people and businesses to earn interest. Due to COVID-19 and a lack of loan demand, banks such as SVB had excess deposits that needed to be put to use.

These excess deposits were then used to purchase government bonds — a perfectly sensible thing to do since government bonds are seen as a safe investment option as you are essentially loaning money to the US government.

But one important point to note about bonds: they lose value as interest rates rise.

When inflation reached unprecedented levels in 2022, the US Federal Reserve (Fed) attempted to contain it by implementing the fastest interest rate hiking program in history. When interest rates rise, bond prices fall because new bonds issued at higher rates become more attractive than the existing bonds with lower rates.

And just like that, the value of all SVB’s newly purchased bonds plummeted, and a significant loss was incurred.

How does this affect crypto?

The closure of SVB shed light on the idea that government actions can have significant long-term consequences for your wealth and financial liberties, prompting many to seek alternative financial systems.

Born out of the 2008 banking crisis, cryptocurrencies were created to address the problems we’ve seen emerging today and to offer an alternative financial system that is more efficient, transparent and decentralised from government control.

After 2008 and now SVB, people are starting to value its power as an alternative and investment capital is leaving banking stocks and flowing into cryptocurrencies.

2. Interest rate increases could be a thing of the past

What happened?

Silicon Valley bank is not an isolated event. Multiple regional banks in the US are in the same situation, with large losses on their US government bond investments. The US Fed has now stepped in to help alleviate the situation by providing loans through its Bank Term Funding Program (BTFP).

The loan program enables cash-strapped US banks to use their government bond holdings as collateral and borrow money to help them meet their customer withdrawal obligations.

What does this mean for interest rates?

While this program provides significant relief to US banks, it does have an impact on future US interest rate decisions.

As earlier noted, rising interest rates reduce the value of bonds. As a result, the Fed is now in a position where, if it continues to raise rates aggressively, it will further reduce the value of the government bonds that they hold as collateral.

Since the BTFP loan program was implemented, the Fed has already begun reducing the size of interest rate increases, with the latest rise in interest rates being +0.25% instead of the previously expected +0.50% increase.

How does this affect crypto?

Interest rates have a direct effect on investments.
- As interest rates move lower, investors gain greater access to cheaper cash in the form of lower-interest-rate loans. With increased investable cash, the demand for riskier assets such as cryptocurrencies increases.
- As interest rates move lower, safer interest-bearing investments start to offer less attractive yields, which further drives demand for riskier assets — like tech stocks and crypto
3. The long-term crypto market may be due for a positive run

What happened?

Bull markets and bear markets are a factor in every investment’s life cycle, and crypto is no different.

But to understand where crypto is going, we need to understand where it has been.

Bitcoin, and in turn, the crypto market, has seen 6 bull markets where prices increase and subsequent 6 bear markets where prices decrease in its lifetime.

Bear markets

On average, a Bitcoin bear market lasts 264 days, and the price falls around -71.00%.

However, the most recent Bitcoin bear market lasted 376 days — 112 days longer than average. The Bitcoin price has also fallen -77.00% from its all-time high — -6.00% more than the average of other bear markets. This is a potential sign that, when compared to historical averages, this bear market is overextended in terms of time and price decline.

Bull markets

On average, a Bitcoin bull market lasts 407 days, and the price increases around 40x its lowest price point.

That means that if we are in the midst of the next bull market, we are still in the very early stages — we’re only 110 days in — and when compared to historical averages, Bitcoin could see prices rise to the $600,000 mark (R11.28m). Prolific investor Cathy Wood from Ark Invest has come out with even bolder price predictions of $1.48m (R27.4m) a Bitcoin by 2030, a return of over +5,100%.

What about other cryptocurrencies?

Historically, when Bitcoin’s price increases by +1.00%, the rest of the crypto market increases +1.20% to +1.30% on average — and the opposite is true when the market is declining.

If Bitcoin is on the verge of its next big bull run, investing in the broader crypto market through an index fund-like product can provide you with a higher return potential while minimising your risk exposure to Bitcoin alone — something known as concentration risk.

source:The 3 key factors behind the crypto bull market’s swift return (businesstech.co.za)
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So, what has caused the cryptocurrency market to react so positively in recent weeks?

Here are 3 reasons why the crypto bull market may have returned sooner than expected.

1. The Silicon Valley banking crisis shines a light on the fragile US Banking system

What happened?

What does this mean?

A bank’s business is to take customer deposits and loan some of them out to people and businesses to earn interest. Due to COVID-19 and a lack of loan demand, banks such as SVB had excess deposits that needed to be put to use.

These excess deposits were then used to purchase government bonds — a perfectly sensible thing to do since government bonds are seen as a safe investment option as you are essentially loaning money to the US government.

But one important point to note about bonds: they lose value as interest rates rise.

And just like that, the value of all SVB’s newly purchased bonds plummeted, and a significant loss was incurred.

How does this affect crypto?

The closure of SVB shed light on the idea that government actions can have significant long-term consequences for your wealth and financial liberties, prompting many to seek alternative financial systems.

Born out of the 2008 banking crisis, cryptocurrencies were created to address the problems we’ve seen emerging today and to offer an alternative financial system that is more efficient, transparent and decentralised from government control.

After 2008 and now SVB, people are starting to value its power as an alternative and investment capital is leaving banking stocks and flowing into cryptocurrencies.

2. Interest rate increases could be a thing of the past

What happened?

Silicon Valley bank is not an isolated event. Multiple regional banks in the US are in the same situation, with large losses on their US government bond investments. The US Fed has now stepped in to help alleviate the situation by providing loans through its Bank Term Funding Program (BTFP).

The loan program enables cash-strapped US banks to use their government bond holdings as collateral and borrow money to help them meet their customer withdrawal obligations.

What does this mean for interest rates?

While this program provides significant relief to US banks, it does have an impact on future US interest rate decisions.

As earlier noted, rising interest rates reduce the value of bonds. As a result, the Fed is now in a position where, if it continues to raise rates aggressively, it will further reduce the value of the government bonds that they hold as collateral.

Since the BTFP loan program was implemented, the Fed has already begun reducing the size of interest rate increases, with the latest rise in interest rates being +0.25% instead of the previously expected +0.50% increase.

How does this affect crypto?

Interest rates have a direct effect on investments.

As interest rates move lower, investors gain greater access to cheaper cash in the form of lower-interest-rate loans. With increased investable cash, the demand for riskier assets such as cryptocurrencies increases.

As interest rates move lower, safer interest-bearing investments start to offer less attractive yields, which further drives demand for riskier assets — like tech stocks and crypto

3. The long-term crypto market may be due for a positive run

What happened?

Bull markets and bear markets are a factor in every investment’s life cycle, and crypto is no different.

But to understand where crypto is going, we need to understand where it has been.

Bitcoin, and in turn, the crypto market, has seen 6 bull markets where prices increase and subsequent 6 bear markets where prices decrease in its lifetime.

Bear markets

On average, a Bitcoin bear market lasts 264 days, and the price falls around -71.00%.

Bull markets

On average, a Bitcoin bull market lasts 407 days, and the price increases around 40x its lowest price point.

What about other cryptocurrencies?

Historically, when Bitcoin’s price increases by +1.00%, the rest of the crypto market increases +1.20% to +1.30% on average — and the opposite is true when the market is declining.

If Bitcoin is on the verge of its next big bull run, investing in the broader crypto market through an index fund-like product can provide you with a higher return potential while minimising your risk exposure to Bitcoin alone — something known as concentration risk.