Why are crypto prices rising? Sector struggling but inflation and interest rates pushing prices up

It’s been a kind few months for cryptocurrency investors. After getting pillaged last year, the sector has rebounded emphatically. 

The surge comes mainly in response to a shift in the expectations around the economy going forward. More specifically, expectations around the actions of the Federal Reserve. 

Last year, interest rates tightened at the fastest pace in history. This sucked liquidity out of the system and the most speculative and high-risk sectors suffered particularly badly as a result. 

Crypto is one of those high-risk sectors, with Bitcoin’s correlation still extremely high with risk stocks. Therefore, the interest rate rises choked Bitcoin, as well as the crypto industry at large. 

But that has changed in 2023. Inflation has softened in the last two quarters – still sky-high, but coming down at least – while fears around a global recession have begun to take centre stage. Exacerbated by the banking wobbles over the last month, the market has moved to assume that the Fed cannot hike interest rates as aggressively as previously anticipated. 

Why are crypto prices rising?

The only problem is, the reasons for this crypto surge have nothing to do with crypto. This is purely a macro-driven rally, as we have discussed above. 

It is the same reason that tech stocks have surged. Names like Tesla (up 72%), Meta (up 70%) and Nvidia (up 88%) have had a bumper quarter, too. 

Not only that, but the conditions within the crypto sphere have been rather worrisome. The most pressing of the developments have been around regulation. 

BUSD was shut down in February, its New York-based issuer, Paxos, forced to stop minting the stablecoin. Its market cap will slowly dwindle down, a blow to the industry which is now forced to filter into USDC and USDT. 

Regulators haven’t stopped there, however. Binance, alongside its CEO, Changpeng Zhao, is being sued by the US Commodity Futures and Exchange Commission. The exchange is alleged to have “disregarded federal laws” for US financial markets, including money laundering and terrorism financing laws. 

There have also been bankruptcies. Crypto lender Genesis went under in January, part of the Digital Currency Group and another domino to fall due to the fallout from the FTX collapse in November. 

Genesis is also embroiled in a row with Winklevoss-twins-owned Gemini, with the former owing the latter $900 million. To muddy the waters even further, both Gemini and Genesis are accused of breaking securities laws by the SEC. 

Finally, there is also the collapse of the largest crypto-friendly banks. Silvergate, Signature and Silicon Valley Bank have all evaporated into thin air. This attacks a vital fiat on-ramp into the industry, an unquestioned headwind for the industry in the long-term. 

The bottom line is that it has been a rather concerning few months across the board for crypto, with minimal good news coming out of the industry. It has simply been the softening of macro conditions that has boosted prices north. 

Liquidity is low and capital fleeing 

One more point to raise with regard to the rising prices is that the market is as thin as it has been. 

Liquditiy has flown out of the industry at an alarming pace. Stablecoin balances on exchanges are at their lowest since 2021, while order books are shallow and volumes are down sharply. 

The thin liquidity exacerbates movements to both the upside and the downside. In this case, the surge has been propelled further upward by the lack of resistance – it doesn’t take a lot to move markets with this amount of liquidity pulled. 

What happens in the future is anyone’s guess. But in the last few months, it is hard to pinpoint anything from within crypto as propelling the dizzying gains. Rather, Jerome Powell and the Federal Reserve continue to hold they key, with their monetary policy plans changing to accommodate for inflation numbers, recessionary fears and banking wobbles. 

If Bitcoin ever decouples, this will all change. But for now, it’s a macro world, and crypto investors are living in it.