Bitcoin tops $30K, but why is it rising & will it continue? Inflation and interest rates hold key

The crypto bear is awakening from its long slumber. 

Last June, Bitcoin was trading at $30,000. Then, emails dropped into the inboxes of Celsius investors, announcing that the crypto lender was suspending withdrawals. It would file for bankruptcy thereafter, the court case ongoing with billions of lost customer assets. 

Bitcoin slid, shedding a third of its value, before numerous other scandals – led by FTX’s staggering fraud – would engulf the crypto world in the ensuing months. It would stay below $30,000 for ten months. Until now.  

Why is Bitcoin rising?

The “why” is sometimes hard to ascertain in the enigmatic world of crypto. Not this time. 

Bitcoin is surging off the back of softened expectations around the future path of interest rates, which have held the key ever since the world transitioned to this new paradigm in April 2022.  

At the start of the year, the baseline expectation was that the Fed would persist with an aggressive tightening cycle well into the summer. The goal? To pull down rampant inflation, the highest since the 70s. 

Interest rates rise, liquidity is sucked out of the system and inflation is reined in, or so the theory goes. And looking at inflation, this is what has happened – it peaked last year and since then has been coming down, although it is still well north of the targeted 2%. 

But things got more challenging recently, as the dark side of rate rises came to the fore: things break. The interest rate is the price of money, the single most important economic lever in the economy. Kicking it up presses down on pressure points, which is exactly what has happened. 

The banking wobbles over the last month were indicative of this, as Silicon Valley Bank went poof in the US, before the carnage crossed the Atlantic and claimed Credit Suisse, putting the entire financial system under threat. 

While the crisis has sicne subsided, we are now we are at the point where the market is predicting that interest rates must peel back, for risk of further chaos. This is why the Fed is between a rock and a hard place – if it hikes more, inflation will come down but a recession is risked (or worse, looking at what happened to banks last month). On the flip side, if you don’t hike, you risk letting inflation persist (or even rise again). 

The market is betting on the latter. The below chart presents interest rate expectations for the target rate at the June 2023 meeting in yellow, compared to the expectations six weeks ago, presented in black. The flip is even greater when pushing out the horizon to later in the year. 

Liquidity remains low

Exacerbating the surge north on charts is the fact that liquidity is so low at the moment. I touched on this last week, but 45% of the stablecoin balance has flown out of exchanges in the past four months. 

There are now less stablecoins on exchanges than at any point since October 2021. Market depth is showing similarly lagging numbers, at its lowest level since prior to the FTX collapse. 

With lower liquidity comes more volatile moves – both to the upside and the downside. This is part of the reason that Bitcoin has seen such explosive gains thus far this year, with the flip in interest rate expectations combining with this minimal liquidity to kick those Bitcoin bids higher and higher. 

While the low liquidity is likely bearish overall, in times of positive sentiment, such as the current environment, it can propell prices upward. Which is exactly what we are seeing. 

Will Bitcoin continue to rise?

Eyes now turn to the all-important inflation data Wednesday. Prior to the last month, recession fears had displaced inflation concerns as the primary fear for markets (I produced a deep dive on that here). However, this has shifted in the last month. 

Banking fears have put pressure on the Fed and with the aforementioned flip in rate expectations, many think that the rate hiking cycle is over, as we discussed above. 

This means that inflation fears could return. Just because price rises are down from the pace at which they were rising last year does not mean that the inflationary beast is slain. Remember, in the 70s, inflation came down three times before surging back even stronger. This should provide food for thought for markets. 

The data Wednesday will give the latest indication as to whether inflation is continuing to come down. A kind reading should give the market further confidence that the hiking cycle could in fact be over, providing further impetus to Bitcoin’s rise. 

Then again, should the reading come in hotter than expecting, there could be a severe selloff, as months of progress on the inflation battle are thrown into the lurch. 

After CPI data Wednesday, market participants will also be awaiting the producer price index out the following day. 

Such is the case right now – macro conditions are driving Bitcoin, and will continue to do so for the foreseeable future, at least. With liquidity low and the economy sitting at a watershed moment, expect volatility, no matter which way things go. 

But that has never been unusual for Bitcoin, right?