Will the SVB Collapse Put an End to the Crypto Winter?

Markets are anticipating the Federal Reserve will take a more gradual approach to raising interest rates in the wake of the failure of Silicon Valley Bank, which could be encouraging for cryptocurrencies that have been severely hit by a tightening economy.

As it raised interest rates from near zero in March of last year, the Fed started an aggressive drive to control inflation. The likelihood of the Fed raising interest rates has decreased now that they are in their target range of 4.50% to 4.75% and the US financial industry is displaying indications of stress.

According to the CME FedWatch tool, the likelihood that the Fed will increase interest rates by 50 basis points at its meeting next week dropped from 40% on Friday to 0%. Since then, the likelihood that the Fed will halt interest rate increases has increased from 0% to 34%.

Jerome Powell, the chairman of the Fed, has stated that interest rates would stay high until the U.S. inflation rate is well on its way to 2%, but James Knightley, the chief international economist at ING Bank, said in an interview with publication Decrypt that the central bank’s approach will likely shift to caution.

They will alter their opinions swiftly if the circumstances call for it, according to Knightley.

What we currently have is a situation in which we may be at the apex right now, theoretically.

If interest rates have peaked, a shift in the Fed’s monetary policy may prompt investors to place more of their funds in risky assets like stocks and cryptocurrencies. Risky assets are now less appealing due to rising interest rates than conservative investments like US Treasury Bills, whose yields have been rising as the Fed tightens.

According to Dessislava Aubert of digital asset data and information services firm Kaiko, any increase in liquidity would be advantageous for the cryptocurrency markets.

Risk assets will gain from the Fed’s recently formed BTFP facility, which provides loans to banks as a source of liquidity, she said.

The price of cryptocurrencies increased on Monday as markets revised their projections for future Fed rate increases. According to data from CoinGecko, Bitcoin increased by 13.5% to almost $24,280 and Ethereum increased by 8.1% to little over $1,680.

Knightly echoed remarks made on Sunday by U.S. Treasury Secretary Janet Yellen when he claimed that Silicon Valley Bank‘s bankruptcy last week was unmistakably a symptom of stress brought on by interest rate hikes.

With only a 7% likelihood that interest rates will be at their present levels or higher by the end of this year, Fed Futures markets forecast that the U.S. central bank would likely start decreasing interest rates at some point in the near future.

But if tomorrow’s inflation estimate comes in higher than anticipated, there’s still a chance the Fed will opt to hike interest rates at their policy meeting next week, according to Knightley.

The Fed faces the danger of pushing the economy into a recession by tightening too much or too rapidly as it attempts to cool the economy and bring inflation down by raising the cost of borrowing for households and companies.

Averting the danger of a severe recesssion

In an interview, CoinShares investment strategist James Butterfill stated that “something’s going to break eventually when you hike rates this quickly,” and he believes that we are already beginning to see it.

According to Butterfill, a shift in the Fed’s monetary policy is favorable for Bitcoin as the institution now places a greater emphasis on market stability than on tightening the financial system.

He claimed that while the US government works to allay concerns about the spread of the Silicon Valley Bank disaster, there is uncertainty around central banks that is advantageous for Bitcoin as well.

As a result, he believed that the price of Bitcoin was performing quite well. He said:

It’s still uncertain as to whether they’ve been able to halt the crisis in confidence at the present. It’s evading investors’ lack of confidence in the financial sector.

Given the regulatory challenges the digital assets sector is currently facing, it is uncertain whether or not the crypto winter will end, according to Butterfill. Just last week, the New York Attorney General’s office announced a lawsuit against the cryptocurrency exchange KuCoin, asserting that Ethereum is a security.

Also, concerns have been raised about the potential for companies that are native to the digital assets industry to form banking agreements following the failure of crypto-friendly banks Silvergate and Signature.

The Consumer Price Index (CPI), which analyzes price changes across a basket of goods and services, reported this month that consumer prices increased 6.4% in the twelve months ending in January.

Despite the fact that the collapse of Silicon Valley Bank has somewhat overshadowed tomorrow’s reading, Chief Economist at Ameriprise Financial Services Russell Price said in an interview with Decrypt that it could still influence the Fed’s future course if the report shows signs that inflation is stubborn.

Price said:

To some degree, it’s kind of pushed the CPI report into the background just a little bit. But if we got data that showed inflation being much more sticky, or stubborn, and not continuing its path of deceleration as it had previously, then that could complicate matters.

Related

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• Silicon Valley Bank shares crash by 60% one day after crypto bank Silvergate shut down