Cryptocurrencies are soaring in 2023 despite a banking crisis, rising interest rates and a slew of new legal and regulatory issues for the fledgling industry.
Bitcoin, the largest and most well-known digital currency, is up 69% in the three months ended March 31, while Ether, the second largest, is up 51%. Bitcoin (BTC) is currently hovering around $28,000, while Ether (ETH) surged above $1,900 per coin on Wednesday, its highest since September of last year. Both are relatively flat over the past 24 hours.
Even Dogecoin (DOGE), a cryptocurrency that started as a joke, surged 30% Monday after Elon Musk swapped Twitter’s bird icon for Dogecoin’s Shiba Inu logo. Doge lost some of those gains on Thursday when the logo was traded back from Twitter.
SkyBridge Capital founder and managing partner Anthony Scaramucci told Yahoo Finance on Thursday, “I would guess right now we’re out of the bear market” for cryptocurrencies. “If anything happens to Binance,” he said, referring to a crypto exchange facing new legal pressures from regulators, “I think it will be a short-term hit.”
Skybridge had some challenges last year when some customers asked to withdraw their funds. It also sold a 30% stake in cryptocurrency exchange FTX before the exchange collapsed. Skybridge’s total assets under management declined to $1.8 billion at the end of 2022, down 50% year over year and down 80% from a 2015 peak of $9.2 billion.
But Scaramucci remains confident in his firm’s crypto investments. “Every time you’ve held Bitcoin on a rolling four-year interval, so picked the day and held it for four years, you’ve outperformed every other asset class,” Scaramucci said.
Anthony Scaramucci attends the 2022 Forbes Iconoclasm at the New York Historical Society on November 3, 2022 in New York City. (Photo by Taylor Hill/Getty Images)
The rapid rise in digital currencies is one of the year’s big surprises for markets after a 2022 crash cost investors billions as higher interest rates and inflation reduced the value and attractiveness of risky assets.
Several crypto players filed for bankruptcy, including FTX in November. Former FTX CEO Sam Bankman-Fried now faces criminal charges for stealing billions of FTX client funds and deceiving investors.
“It’s a recovery from the really poor performance that we saw in 2022,” VettaFi Research Director Todd Rosenbluth told Yahoo Finance on Tuesday.
Ironically, what lent additional momentum to the market this year was a banking crisis in March that shut down three lenders, including two that specifically catered to cryptocurrency customers.
Some investors chose to seek cryptocurrencies as a safe haven from perceived banking instability. Others believed that the Fed might have to cut interest rates in response to the crisis, which would encourage further inflows into alternative risk assets.
Bitcoin is up more than 33% and Ether is up more than 26% since March 10, the day regulators seized Silicon Valley Bank in the second largest bank failure in US history. The total value of all crypto assets is up more than 22% during this period as of 8:30 a.m. ET Friday.
Regulatory pressure ramps
This year’s crypto comeback is unfolding as regulators in Washington ramp up their efforts to contain this market.
The Securities and Exchange Commission has issued 11 enforcement actions against crypto firms and individuals since early January, serving formal letters to Paxos, DeFi exchange Sushi and Coinbase Global (COIN) warning the agency to launch an enforcement action. Coinbase is the largest US crypto exchange.
Coinbase shares have rebounded 73% year to date, but are still two-thirds down from where they were a year ago.
Another regulator, the Commodities and Futures Trading Commission, has also sued crypto exchange Binance and its CEO Changpeng Zhao for allegedly selling derivatives backed by digital assets to US customers despite not being registered to do so.
Zhao Changpeng, founder and chief executive officer of Binance, speaks during an event in Athens, Greece November 25, 2022. REUTERS/Costas Baltas
“This industry is not in a good position of trust with the public, investors and customers right now,” 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 they “learned” from FTX’s collapse last November as regulators try to move fast to understand the technology. The CFTC has worked with other agencies on enforcement cases, “and I think you’ll probably see more of that,” she added.
Liquidity dried up
Another concern for some investors is that liquidity for major cryptocurrencies has fallen to record lows. Data from research firm Kaiko shows that the ease of converting Bitcoin and Ether into cash has fallen by an overall 50% and 41%, respectively, since FTX filed for bankruptcy on Nov. 11.
“It tires me out of every recent rally even though bitcoin is pretty close to $30,000,” Christopher Newhouse, a crypto derivatives trader at GSR, told Yahoo Finance.
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Newhouse said he fears everyday traders will not enter the market, citing recent sizeable allocations to bitcoin and ether made by major group companies Binance and MicroStrategy (MSTR). MicroStrategy announced in an SEC filing on Wednesday that it bought just over a thousand bitcoins, bringing its total BTC stash to around $3.9 billion, according to current market prices.
“I wonder if there are really new entrants entering the market and if this rally is sustainable from a price perspective or if organic buying has waned,” added Newhouse.
But since early February, Bitcoin’s 50-day moving average has surged above the 200-day moving average, a so-called “golden cross” pattern that is suggesting to chart users that market sentiment has switched from bearish to bullish.
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