On Thursday, Bitcoin was up 2% to $48,200, while Ether, the Ethereum blockchain network’s coin, was up 8% to $4,050, indicating that crypto markets may be recovering from oversold conditions.
Cryptos had fallen in value as central banks reduced pandemic-related relief measures, implying tighter global liquidity. Nonetheless, the market appears to be regaining strength as central banks prepare investors for tighter liquidity and higher interest rates.
The Bank of England, the first major central bank to do so, raised interest rates on Thursday. Following a wind-down of its bond purchases, the Federal Reserve said on Wednesday that it expects three rate hikes in 2022.
The Fed’s announcement sparked a stock market rally, but the market gave back some of those gains on Thursday, with the Nasdaq Composite index falling 2% in afternoon trading.
One explanation for crypto’s relative strength is that fears of a “taper tantrum” were already priced in, resulting in a rally as the Fed’s outlook was devoid of surprises.
In a note published on Thursday, Fundstrat Global Advisors wrote, “This speaks to the idea that a taper tantrum is not the straw that breaks crypto’s back.” Bitcoin rallied from under $1,000 to $19,000 in 2017, despite five interest rate hikes, according to Fundstrat. “We believe this at least signals that rate hikes will not be the trigger for a prolonged bear market,” says Fundstrat.
According to J.P. Morgan, prices in futures markets indicated that Bitcoin and Ether had been oversold.
“Both Bitcoin and Ethereum have experienced momentum decay in recent weeks,” J.P. Morgan’s global market strategy team wrote in a note on Thursday. Over the last month, short and long-term momentum has been “downshifting” and is now near oversold levels seen in May and June of last year.
Bitcoin and Ether futures have entered a state of “backwardation,” which means spot prices have moved slightly higher than futures prices. This is a bearish signal, indicating that investors are willing to pay more for a commodity today than they would for future delivery. When futures prices trade above spot prices, this is referred to as “contango.”
The futures curve shifts into backwardation when demand is particularly weak, and price expectations turn bearish. They point out that the last time Bitcoin and Ether futures went into backwardation was in May and June. Prices remained low throughout the summer before rising in October.
According to J.P. Morgan, the current selling pressure may be coming from large momentum traders in the futures markets, such as commodity trading advisors or CTAs. Furthermore, stablecoins—tokens designed to maintain a fixed $1 value—can earn 10% yields, providing a high “risk-free” rate that may be more appealing than Bitcoin or Ether futures returns.
Even so, as interest rates rise, the opportunity costs of holding cash increase. It remains to be seen whether cryptos can maintain their gains as the cost of other high-risk assets rises.
Read more:
Comment Template