Bitcoin Leads Rally Over Ether as Banks Teeter

Traders and investors are flocking to bitcoin as uncertainty surrounds traditional banking institutions following last week’s collapse of Silicon Valley Bank.

Speculation is mounting over whether the Federal Reserve intends to rethink its campaign of future rate hikes amid a period of uncertainty, and even whether the government would once again resume quantitative easing (QE) measures.

While some believe the fallout from Silicon Valley Bank, Silvergate and Signature Bank has only added fuel to the fire, not all are convinced.

“The narrative is bailout and back to quantitative easing,” Dmitry Lapidus, junior partner at Dragonfly, told Blockworks. “I’m not convinced that’s true, although markets are definitely starting to fight the Federal Reserve again and crypto is responding.” 

The primary objective of QE, narrated by policymakers in the past, has been to increase the supply of money and credit in the economy, which can lower interest rates and stimulate economic activity, particularly in the credit markets and the banking sector. 

In the short term, QE can lead to a boost in asset prices, such as stocks, bonds, and real estate, as investors seek higher yields in response to lower interest rates. In turn, this can help create a “wealth effect” that encourages consumer spending and business investment, leading to further support for economic growth and job creation.

Bitcoin may be leading a risk-on rally based on that shifting sentiment.

The world’s largest digital asset by market value is up more than 48% this year compared to ether’s 39% at $24,800 and $1,660 respectively, data from Blockworks Research shows. In the past week alone, both assets are up around 20% and 15%.

A look at the bitcoin to ether ratio, which measures the relative value of two, shows it is now at its highest point since the collapse of FTX in November last year, TradingView data shows.

Bitcoin’s outperformance over ether could reflect some unease over Ethereum’s upcoming Shanghai-Capella upgrade.

The ratio is also often used by traders and investors to determine which crypto is performing better at a given time. A high ratio suggests that bitcoin is outperforming ether, while a low ratio suggests the opposite.

“When traders are unsure about crypto prices, they flee to stables. When they’re unsure about stables, they flee to banks,” Paul Kremsky, trader and global head of Business Development at Cumberland, wrote in a LinkedIn post on Monday.

“But when they’re unsure about banks? It’s bitcoin’s time to shine,” he said.

This week marks the ten-year anniversary of a bank run that occurred in Cyprus, during which ATMs were drained, and bank vaults were emptied. 

The event caused bitcoin to experience its largest-ever rally in terms of percentage increase, surging from $45 to $260 within a month, Kremsky added.

It’s worth noting that typically following a bitcoin-induced rally the market tends to experience a period of consolidation or a correction, as seen as recently at the start of January this year. Prices have begun to consolidate in a tight range between $24,300 and $25,000, data shows.

Markets leading the fed

Kremsky pointed to a tweet by Jim Bianco, president of market analysis firm Bianco Research, discussing a significant decline in the yield of the 2-year US Treasury note. 

Lapidus highlights there was a significant decline in the 2-year rates on Monday, the largest since 1982, suggesting markets may be leading the US Federal Reserve on interest rates. 

While he predicts a 25 basis point hike, it marks a sharp shift from the market’s previous expectation of 50 basis points last week, indicating a 180-degree turn from bearish to bullish sentiment. 

That would, in turn, point to an increased appetite for risk-on assets like bitcoin over the mid-term, a pattern that’s often reflected in rate adjustments from the fed.

“Rate markets have priced as dramatic a 180 as I’ve ever seen,” Hal Press, founder of North Rock Digital, tweeted Tuesday. “Not to be biased, but the most obvious takeaway so far is that bitcoin and ether are probably the two best assets to own in the entire universe of investable assets.”

In a world where moving money around matters, crypto is a much better asset for handling that. Crypto is a more obvious beneficiary of potential future stimulus, he said.

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