Renewed appetite for risk in the markets is fueling an explosive rally in the cryptocurrency market. The sector is already up by more than $280 billion, posting the best January since 2013. The rally has come amid growing expectations that the US Federal Reserve will go slow on monetary policy tightening. Consequently, the US dollar has come under pressure pulling back from a decade high to near the 100-barrier level against the majors. A weakened dollar works in favor of cryptocurrencies.
Bitcoin, the flagship cryptocurrency, is spearheading the rally after a roller-coaster in 2022. The coin is already up by more than 40% for the year and on the cusp of powering through the $25,000 a coin level. In addition, smaller coins like Solana, Axie Infinity and Decentraland are also attracting investors’ dollars and have doubled in value since the start of the year.
The rally in the crypto market looks set to continue amid growing expectations that the FED will go slow on interest rate hikes. Reports that the FED could start cutting interest rates later in the year as inflation moderates is also working in favor of riskier assets. Rate cuts are expected to lower borrowing costs which could see most people borrowing to invest in riskier assets such as cryptocurrencies.
Apart from the easing monetary tightening, the crypto sector appears to have moved away from the fallout triggered by the collapse of the FTX exchange. Moreover, the industry is also slowly bouncing back from the spate of layoffs in the sector that had raised serious concerns about its long-term prospects.
Will the Bounce Back Last?
Nevertheless, there are growing concerns about whether the bounce back in the crypto sector and the stock market will last. The global economy is still teetering on the brink of recession amid the high-interest rate environment. As a result, there is a growing concern about whether there will be a soft landing for the markets amid the high-interest rate environment.
There have been calls for the FED to go slow on interest rates to prevent the risk of the economy plunging into recession. After four consecutive hikes of 0.75, the FED increased by a quarter percentage point in its latest meeting. It is also expected to hike by a quarter point this week as part of the moderation,
Unless the FED and other central banks cut interest rates, there may not be a soft landing for the markets needed to fuel demand for riskier assets like Bitcoin. FED chair Jerome Power has already hinted at the possibility of keeping rates at elevated levels in a bid to combat inflation levels that remain at elevated levels
The fact that hedge funds have placed big bearish bets on bond futures raises further concerns about whether their overall financial markets have bottomed out and are poised to continue rallying. The record bearish bets on bond futures don’t support the narrative that peak interest rates are close.
Economists at Godman Sachs believe market pessimism is overdone. The analysts expect the market to be more resilient going forward. However, the sentiments could result in longer periods of higher rates which would not work in favor of cryptocurrencies.