Impact of rising inflation rates & banking sector turmoil on crypto market

Bitcoin’s rally to over $25k in recent weeks and finally to 30k is a significant sign that a bull run might not be so far away. The news has added a layer of confidence in investor attitudes even as the banking sector faces a crisis.

Numerous assessments in the financial markets have poked holes in the wider banking industry after the failure of an investment bank—a situation that has rallied crypto coins. Ether and Bitcoin have been a key watch lately, and investors, having earlier shunned the crypto domain due to higher inflation rates, are starting to pay more attention. 

The troubled financial sector rallying Bitcoin

High-interest rates usually mean a period to flee from risky assets such as crypto to others mostly protected by the government. Indeed, that was the case until the news that the Silicon Valley bank had blown up. The news rallied Bitcoin 18 percent higher, which has so far touched the $30K mark.

Bitcoin is surging and has currently equaled its June 2022 highs. The surge followed an announcement by US regulators of an impending relief to all parties affected by Silicon Valley’s failure. Additionally, the aggressive increase in interest to tame inflation in the past year has slowed in the past weeks—a situation that has helped relieve panic in the market.

The torrid banking sector

Higher rates occasioned by the new policies put forward by the US government are helping push down inflation. However, the policies also birth new challenges for the once bustling financial sector. The sector faces higher funding costs, which have a ripple effect on bond prices and, ultimately, stock prices. Limited growth in stock and bond prices also discourages investors from taking new positions, pushing them to other avenues of investment.

The potential of Bitcoin has come under scrutiny, having passed the test by resisting a run-on in a period of multi-decade high-interest rates. Indeed, such a performance has made it a favorable tool when other sectors are under pressure from environmental and government forces.

However, while the positive movement of bitcoin recently is shifting investor attitudes towards crypto, recent bankruptcies in the industry are also worrying. Topping the list are BlockFi and Celsius. Additionally, exchanges like FTX, accused of fraudulent activities, have pushed the confidence of crypto instruments to an all-time low.

A near full recovery for other aspects of the crypto market

While Bitcoin and ETH can fluctuate depending on how much of them are needed in the market and how many are available for supply, the USD coin must maintain parity with the dollar. For the better part of its existence, the USD coin has guaranteed this to investors. The coin preserves a fair reserve of its entire value in real USD safely in the bank, meaning a stable banking industry is critical to its healthy existence.

The shutdown of Silicon Valley Bank destabilized the relationship to some extent, pushing USD 10% down against the dollar. A further announcement by USD coin owners that they will only insure those with deposits of more than $250,000 created further panic in the crypto market. The coin risked a run-on.

Assurances from the federal government to ensure those affected by Silicon Valley’s woes have created confidence in the crypto market once more, which has helped the USD coin and the entire crypto market to pick up and close in on past highs. 

Bitcoin’s short and long-term outlook

The USD coin’s recovery and falling inflation rates in the majority of the world are reasons that will continue to rally the crypto market. Future rallies will also benefit from a slowdown in interest rate rises that initially sent panic in the crypto domain. As the markets recover from high-interest rates and inflation, Bitcoin and the crypto industry will flourish.

Closing remarks

The high-interest environment is a reason for the flattering crypto markets that dominated 2022. However, as the financial markets shift towards lower inflation and interest rates—Bitcoin and other risky commodities will dominate the market again. The rally will probably pick up more when inflation falls as the year closes.