Is the BTC a Pause that Will Refresh Later in 2023?

Bitcoin prices nearly doubled in 2023 after experiencing headwinds throughout most of 2022 (see chart). The decline in the price and the subsequent rebound is likely a function of several scenarios. During 2022, central banks around the world were increasing interest rates. The Federal Reserve embarked on an unprecedented restrictive policy stance raising short-term borrowing rates by nearly five percent in the last 12 months.

Their actions lifted the value of the U.S. dollar versus most major currencies and cryptocurrencies. As the Fed started decelerating its tightening stance, U.S. interest rates beyond two years began to fall, which weighed on the dollar and helped Bitcoin gain traction. Another scenario that helped lift Bitcoin was the recent issue related to regional banks in the United States.

Higher rates put pressure on regional banks that did not correctly hedge their interest rate exposure. A run on banks started as investors started scrambling to put their money in larger banks or different assets. Bitcoin benefited from this bank run and has remained buoyed during this tightening policy period.

What Fiat Currencies Trade Against Bitcoin?

To purchase Bitcoin, you need to exchange a fiat currency for it. Bitcoin, like other fiat currencies, uses an exchange rate to determine the value of the cryptocurrency. You can trade cryptocurrencies versus others, but initially, you might have to exchange a fiat currency for Bitcoin. The most active fiat currency that trades versus Bitcoin is the U.S. Dollar. More than 85% of the Bitcoin trading occurs versus the greenback. As of 2021, the Korean Won was the second most active fiat currency traded versus Bitcoin. This situation is because nearly 10% of the Korean population invest in Bitcoin. The Japanese Yen is the third most active fiat currency that trades versus Bitcoin. Following the Yen is the Euro.

What is a Fiat Currency?

A fiat currency is a currency that is declared legal tender by a government but is not backed by a physical commodity. A central bank usually issues it and is not supported by a physical commodity such as gold or silver. Fiat money has value only because a government maintains its value or parties engaging in exchange agree. The most widely traded fiat currency is the U.S. dollar. For the Euro, or any actively traded currency, to be considered a major currency, it must trade against the U.S. dollar.

Why Did the Dollar Rally and Bitcoin Fall?

Part of the reason for the decline in the value of Bitcoin was the rally in the U.S. dollar versus most major fiat and cryptocurrencies. The dollar rally started with the change in policy stance from the Federal Reserve ahead of other central banks worldwide. The Federal Reserve, in early 2022, began to increase interest rates and quickly accelerated the pace of tightening. By Q2 2022, the Fed has started to raise rates by 75 basis points and announced the change to Fed fund rates multiple times.

The Federal Funds Rate is the interest rate at which depository institutions lend reserve balances to other institutions overnight, on an uncollateralized basis. The Federal Funds Rate is the Federal Reserve’s primary tool to influence the supply of money and credit in the U.S.

The change in U.S. interest rates relative to other currencies and cryptocurrencies’ interest rates started to impact the greenback’s value. As the interest rates in the U.S. rose, investors began to park money in the dollar to benefit from the higher yields.

Why Did Bitcoin Start to Rebound in 2023?

After an aggressive restrictive policy cycle, the Federal Reserve seems close to the end of its tightening campaign. They no longer believe that additional tightening of rates needs to take place and instead feel that the data will provide the necessary information they need to stem higher inflation or declining economic growth.

The tightening cycle had an impact on several industries, including regional banks. Silicon Valley Bank in the United States was the poster child for the decline in the regional banking sector. The company had 17 branches and $200 billion in assets, and $180 billion in deposits when all hell broke loose.

To make a long story short, Silicon Valley Bank purchased U.S. government bonds receiving a yield higher than the short-term deposits it paid its customers. When the Fed started raising rates, its bond portfolio lost money. Since these government bonds will pay off at the end of maturity, you do not need to take a realized loss until the maturity of the bonds.

What does happen is that a bank would need to report its unrealized loss, which reflects the value of the bonds when they report this number to regulators. Your unrealized loss is a mark-to-market loss instead of a realized loss. An unrealized loss is generally a loss you incur where the loss is not fixed and can change based on the value of your security. For example, if you purchase Bitcoin at 30,000 and it declines to 29,000, you have an unrealized loss of $1,000 multiplied by the number of Bitcoin you hold. If you sell your Bitcoin, then you have a realized loss. This calculation can help you determine what is cryptocurrency trading losses.

Silicon Valley Bank needed to state that it had a $2 billion unrealized loss when it reported its earnings. The report set off a panic, and depositors rushed to the doors. Silicon Valley Bank scrambled to raise capital as depositors left, but the damage was done, and the stock price sunk to nearly zero. Regulators realized they needed to seize the bank and place the institution within the purview of the Federal Deposit Insurance Company. Here the deposits that were under $250,000 would be fully insured. Eventually, Silicon Valley Bank was purchased by First-Citizens bank.

The sell-off in Silicon Valley was mimicked by other regional banks, including Signature Bank in New York and First Republic Bank. Recently JP Morgan Chase purchased First Republic Bank. The government arranged the sale in each of these cases. The fear generated by those who have deposits in some regional banks and businesses that have deposits in some regional banks are fleeing to more established banks and cryptocurrencies.

Technical Picture

BTC/USD came off the lows in 2023, doubling and now hovering near the 200-week moving average, which is likely support. The 50-week moving average has recently crossed above the 200-week moving average, so a long-term up trend is likely in place. This moving average crossover is called the golden cross and refers to a period where an uptrend is established.

The decline in the weekly relative strength index (RSI) reflects the slowdown in the upward momentum. The RSI is a momentum oscillator that measures the direction of acceleration. It also can tell you where a cryptocurrency is overbought or oversold. BTC/USD was overbought in April and has drifted lower since.

The MACD (moving average convergence divergence), also a momentum indicator, is drifting lower and poised to generate a crossover sell signal. This situation occurs when the MACD line (the 12-week moving average minus the 26-week moving average) crosses below the MACD signal line (the 9-week moving average of the MACD line). The slow decline in the MACD line shows that negative momentum is accelerating and likely to point to a minor correction. The daily momentum is similar. The MACD has generated a crossover sell signal indicating a temporary correction in the BTC/USD.’

The Bottom Line

The upshot is that after surging and doubling since the beginning of 2023, BTC/USD is taking a much-needed rest. The headwinds which generated the decline are nearly ending, and with a loosening of monetary policy, the rise in the dollar is likely near its end. With U.S. interest rates probably stabilizing and potentially falling within the next two years, cryptocurrencies will likely continue to rebound after trading sideways for a while.

The acceleration in interest rates is starting to be felt. Regional banks in the United States are trading under pressure (see chart) with the concern that some may experience further deposit declines. Most go under the impression that the FDIC would be able to insure all deposits on a default, but that has yet to be tested. For this reason, cryptocurrencies continue to gain favor and could experience a pause that refreshes higher.

The technicals currently back up this stance as the weekly RSI moved above 70 in April and has since eased with a pause in upward momentum. The MACD has turned negative and is poised to generate a weekly crossover sell signal which shows that negative momentum could have ended and positive momentum has ended.