Cryptocurrencies are pushing higher in 2023 despite a banking crisis, rising interest rates, and a slew of new legal and regulatory headaches for the fledgling industry.
Bitcoin, the largest and best-known digital currency, rose 69% in the three months ending March 31, while ether, the second-largest, was up 51%. Bitcoin (BTC) is currently hovering near $28,000 while ether (ETH) on Wednesday climbed above $1,900 per coin, its highest level since September of last year. Both are relatively flat over the last 24 hours.
Even Dogecoin (DOGE), a cryptocurrency that began as a joke, shot 30% higher Monday after Elon Musk swapped Twitter’s bird icon with the Dogecoin’s Shiba Inu logo. Doge forfeited some of these gains on Thursday when Twitter’s logo was swapped back.
SkyBridge Capital Founder and Managing Partner Anthony Scaramucci told Yahoo Finance Thursday, “I would guess right now that we’re through the bear market” in cryptocurrencies. “If something happens to Binance,” he said, referring to a crypto exchange experiencing new legal pressure from regulators, “I think it will be a short-term hit.”
Skybridge had some challenges last year as some customers requested to withdraw their money. It also sold a 30% stake to crypto exchange FTX before the exchange collapsed. Total assets under management at Skybridge dropped to $1.8 billion at the end of 2022, down 50% from a year earlier and down 80% from a 2015 peak of $9.2 billion.
But Scaramucci remains confident in his firm’s crypto investments. “Any time that you’ve held bitcoin in a four-year rolling interval, so you pick the day, hold it for four years, you’ve outperformed every other asset class,” Scaramucci said.
The rapid climb of digital currencies is one of the year’s big surprises in markets after a crash in 2022 cost investors billions as higher interest rates and inflation lowered the value and appeal of risky assets.
Several crypto players filed for bankruptcy, including FTX in November. FTX’s former CEO Sam Bankman-Fried now faces criminal charges that he stole billions of FTX customer funds and misled investors.
“It’s a bounce back from the really poor performance we saw in 2022,” VettaFi research head Todd Rosenbluth told Yahoo Finance on Tuesday.
What gave the market added momentum this year, ironically, was a banking crisis in March that took down three lenders, including two that specifically served cryptocurrency customers.
Some investors chose to seek out cryptocurrencies as a safe haven from the perceived instability of banking. Others anticipated the Fed might have to cut interest rates in response to the crisis, sparking more flows into alternative risk assets.
Since March 10, the day regulators seized Silicon Valley Bank in the second-largest bank failure of U.S. history, bitcoin is up more than 33% and ether is up more than 26%. The total value for all crypto assets is up more than 22% during that period, as of Friday at 8:30 a.m. ET.
Regulatory pressure ramps
This year’s crypto comeback is unfolding even as Washington regulators step up their efforts to rein in this market.
The Securities and Exchange Commission has issued 11 enforcement actions since the beginning of January against crypto firms and individuals, while serving formal letters to Paxos, DeFi exchange Sushi, and Coinbase Global (COIN) warning the agency plans to bring an enforcement action. Coinbase is the largest U.S. crypto exchange.
Coinbase shares have rebounded 73% year to date but are still two thirds below their value a year ago.
Another regulator, the Commodities and Futures Trading Commission, also has sued crypto exchange Binance and its CEO Changpeng Zhao for allegedly selling derivatives backed by digital assets to U.S. customers despite not being registered to do so.
“This industry is not in a good trust position right now with the public, with investors, with customers,” CFTC commissioner Christy Goldsmith Romero said Wednesday at the Links NYC conference hosted by crypto firm Chainalysis.
Goldsmith Romero noted that crypto firms are still grappling with issues “learned” from the collapse of FTX last November while regulators try to move fast to understand the technology. CFTC has worked enforcement cases with other agencies, “and I think you’ll probably see more of those,” she added.
Liquidity dries up
Another concern for some investors is that liquidity for major cryptocurrencies has fallen to record lows. Data from research firm Kaiko shows the ease of exchange between bitcoin and ether into cash has fallen a total 50% and 41% respectively since FTX filed for bankruptcy on November 11.
“It makes me weary of any recent rally although bitcoin is quite close to $30K,” Christopher Newhouse, a crypto derivatives trader with GSR, told Yahoo Finance.
Newhouse said he worries everyday traders aren’t entering the market, citing recent sizable allocations to bitcoin and ether made by major corporate players Binance and MicroStrategy (MSTR). MicroStrategy disclosed Wednesday in an SEC filing that it purchased a little over a thousand bitcoins, raising its total BTC stash to roughly $3.9 billion, according to current market prices.
“It makes me wonder whether new entrants are really entering the market and from a price perspective if this rally is sustainable or organic buying has died down,” Newhouse added.
But since the beginning of February, bitcoin’s 50-day average has risen above the 200-day moving average, a so-called “golden cross” pattern that suggests to chart users that market sentiment has flipped from bearish to bullish.
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