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Bitcoin price exploded beyond $26,000 earlier today in one of the largest single-day movements in the past couple of months. The price of Bitcoin increased from $21,700 on Monday to a multi-month peak of 26,264 today, gaining over +20% in the span of roughly 30 hours.
The last time that Bitcoin was trading this high was last June, over nine months ago. So what’s the reason that Bitcoin exploded in value in such a dramatic fashion? Let’s take a look.
Why is Bitcoin up today?
There are several factors that have contributed to Bitcoin’s massive move into the green zone in the past couple of days, including USDC regaining its peg, the release of encouraging inflation data, and a potential reversal in the Fed’s interest rate strategy. We are going to examine each of these in the following sections.
USD Coin drama and stablecoin liquidity shifting to Bitcoin
On Saturday, the price of USD Coin, a stablecoin whose price should at all times follow the 1:1 peg to the US dollar, fell below $1. The reason for this was simple – Silicon Valley Bank, one of the largest holders of Circle’s (issuer of USDC) cash reserves announced it had severe liquidity problems. The news put a question mark on Circle’s ability to redeem USDC for USD and many investors rushed to convert their USDC to other assets.
In addition to USDC, several other stablecoins (many of which are collateralized with USDC), including DAI, GUSD, and USDD also lost their $1 peg. At its lowest, USDC was trading at roughly $0.88, but the coin has since successfully re-pegged.
A large part of stablecoin holdings was converted into Bitcoin, Ethereum, and other digital assets. This transfer of liquidity could be a big reason why Bitcoin has rallied. It also points to the fact that many investors see Bitcoin as a safe haven asset in times of broader market distress.
It is worth noting that decentralized trading saw an immense spike due to traders swapping their USDC. Uniswap, for instance, saw its largest trading day in history on Saturday, reaching $11 billion in 24 hours (about 5% of Nasdaq).
Core inflation increases 5.5% YoY but cools off MoM
The Bureau of Labor Statistics released a new inflation report earlier today, documenting the changes in Consumer Price Index (CPI) over the past year. According to the report, CPI for all items increased by 6% in the past 12 months, while the core CPI increased by 5.5%. Meanwhile, the inflation rate cooled off in February compared to the month prior, from 0.5% in January to 0.4% in February. In other words, the pace at which inflation is growing has cooled off.
According to the report, the biggest reason for the low rate of inflation reduction in February was shelter, which accounted for 70% of the increase in CPI. The Bureau noted:
“The all items index increased 6.0 percent for the 12 months ending February; this was the smallest 12-month increase since the period ending September 2021.”
The end of interest rate hikes?
The recent issues in the US banking sector, headlined by Silvergate Bank and Silicon Valley Bank, have led many investors to believe that the Fed could be momentarily pausing interest rate hikes, or even start lowering the benchmark rate.
According to some reports, the key reason for the failure of Silvergate and SVB was the banks’ exposure to long-term treasury bonds accrued during the Coronavirus pandemic and their drop in value after the Fed started raising interest rates. Since a major share of the banks’ assets was in treasury bonds, they had problems with providing enough liquidity when investors wanted to withdraw their deposits. Not only that, the banks were forced to convert their bond portfolios at a loss due to high interest rates.
With concerns over systemic risk in the banking sector mounting and questions raised about other banks' exposure to long-term bonds, the Fed is expected to put interest rate hikes on hold after another 25 bps hike in March. According to CME FedWatch Tool, some investors believe that the Fed won’t be raising interest rates at all in March, leaving them in the 4.50-4.75% range. One of these investors is Goldman Sachs (GS), which stated the “recent stress in the banking system” will make the Fed reconsider its stance on the upcoming rate hike:
"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March." – Goldman Sachs
We will have to wait until the next Fed meeting on March 21 and 22 to see what the central bankers decide.
In the meantime, a reversal in the central bank’s hawkish monetary policy could be a major boon for Bitcoin and other cryptos. After all, cryptocurrencies have benefited majorly from a low and near zero-rate interest rate environment that started after the 2008 crisis and lasted up until last year.
The bottom line: A culmination of macro effects has helped Bitcoin reach its nine-month high
A pause in interest rate increases, a moderately improved inflation status, and a transfer of funds from stablecoins helped fuel the Bitcoin rally in the past couple of days. While it may seem that Bitcoin is a good investment right now, it is important to note that the market is extremely volatile, and anything can happen in the short term.
However, if you are investing in crypto for the long term, Bitcoin offers a clear upside and potential for future price growth. In fact, our algorithmic price prediction algorithm forecasts Bitcoin to break the $100,000 mark in early 2024, which coincides with Bitcoin halving, one of the most important events in the crypto industry and – at least historically – one of the most important price drivers.