Bitcoin soars as U.S. banks crash

Bitcoin 

By Friday of last week Bitcoin had dropped by more than -11%, however, on Saturday it started staging one of its biggest comebacks in history. Since the lows of about $19,500 on Friday, Bitcoin has rallied by more than 30% to $25,825 as of noon on Tuesday.

The price volatility was largely driven by macro events, which we will discuss in depth in our next sections. For now, let’s zoom into some interesting structural setups that fuelled the recent rally, and some technical insights. 

First, let’s focus on the short interest activity. On Thursday and Friday, as news about U.S. banks started to emerge, many investors built up short positions in Bitcoin. Between Wednesday and Saturday, short interest in bitcoin on the Bitfinex exchange went up by +156%. However, as Bitcoin started rallying on Sunday, short positions have been obliterated and are down -56% from their peak on Saturday.

This is consistent with data from Coinglass showing that more than $100 Million in bitcoin short positions had been liquidated on Monday. In short, we saw a lot of shorts build up and disappear in the span of a week. 

In terms of technical levels, we saw bitcoin hold the 200-day moving average support that we had been tracking at $19,700 on the move down.

Subsequently, bitcoin rallied on positive news and a short squeeze rally to the 200-week moving average in the span of 3 days. At the time of writing, Bitcoin is holding above the 200-week moving average resistance level. From a technical standpoint, it will be key for bitcoin to remain above this level by end-of-week on Sunday evening. 

Beyond the 200-week moving average, which is sitting at approximately $25,250, the next key resistance level for bitcoin to the upside would be $30,000.

Digital Asset Markets:

1. That Bitcoin Bounce

With the news of Silvergate bank being closed down, Bitcoin’s selloff accelerated on Thursday as concern mounted that U.S. banking regulators were launching a covert operation to choke crypto firms from access to banking services. 

Then, on Friday, news broke that Silicon Valley Bank would also be closed down. While Silvergate was clear to say that all client deposits would be fine, it was unclear whether clients with deposits at Silicon Valley Bank would also be able to access their funds. This impacted crypto as Circle’s USDC stablecoin reserves held a small portion of its cash reserves at Silicon Valley Bank. This accelerated the selloff on Friday and even caused USDC to temporarily lose its peg on Saturday and part of Sunday. However, the Federal Reserve made an emergency announcement on Sunday stating that all deposits at SVB, and Signture banks, would be fully insured and deposits would be available to all. It also created a facility to backstop other banks in potentially similar situations.

The Fed’s announcement on Sunday evening did 2 things to digital asset markets:

2. The move by the Fed has been touted by some as a signal that “something is breaking” due to their fast pace or interest rate increases and that they need to pivot/pause. Goldman Sachs put out a report over the weekend stating that they do not expect the Federal Reserve to raise rates during next week’s meeting. Some investors and market observers are seeing this event as the much awaited “Fed Pivot”, which has injected markets with optimism. This can be observed by the S&P and equity markets being “flat” on a day where nearly a dozen regional banks were halted for trading.

The combination of USDC’s reserves being guaranteed, and the idea that a “Fed Pivot” could be around the corner has jolted markets. 

Macro:

2. Banks

The recent news that Silvergate and Signature bank were being closed by U.S. regulators and their deposits guaranteed, caused many to believe that the moves were part of a coordinated effort to restrict access to banking to crypto companies. 

To be clear, the reason most of these banks failed was _not_ because of bitcoin or crypto. Dozens of banks had to be halted from trading, because investors were dumping their stocks - and most of them had nothing to do with crypto.

And while it may be true that some crypto friendly banks in the U.S. have been shuttered, there are others that see immense opportunity in taking their place. 

As you can see from the names in the above article, most banks that are openly taking crypto clients seem to be off-shore. That’s not a surprise, as these banks look to take in the billions in potential deposits from compliant crypto companies that have raised venture funding. However, another potential outcome of this recent onslaught on U.S. banks is that it will push innovation and investment offshore. Bitcoin and crypto companies will now have incentives to move jurisdictions to be closer to their banking partners and where they feel more welcome.

The Week Ahead 

Earlier this week we got U.S. inflation data, showing that inflation had dropped to 6% in February, but “core” inflation, the one the Fed is most worried about, remains stubbornly sticky. At the time of writing, the CME FedWatch tool shows investors are pricing a 76% chance of a 0.25% increase for next week’s meeting - which would bring interest rates to 5%. Later this week we will get an interest rate decision from the European Central Bank where it is expected they will raise rates by 0.50% to 3.50%. On Friday we will also get inflation data for Europe in the month of February.

As always, here’s a summary of the events and data that could move markets in the week ahead:

Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.

Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts. This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers