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Crypto’s Path Out of the Financial Market Uncertainty

March 16, 2023

Author: CryptoSherry

Introduction

Credit Suisse , one of the largest banking institutions in Switzerland with a history that dates back to the mid-19th century, has reported a total net loss of more than 7 billion Swiss francs for 2022 and warned of a “substantial” loss for the first quarter of 2023. Credit Suisse shares plunged to record lows of 30 per cent, prompting it to borrow $54 billion from the Swiss central bank to shore up its finances.

Credit Suisse’s financial struggles can be attributed to three main factors:

  1. Risky Investments - Exposure to complex financial instruments such as CDOs and MBSs has left it vulnerable to significant losses in the event of a market downturn.
  2. Scandals and Legal Issues - Credit Suisse was fined €238m in a French money laundering case last year plus $2.6bn for helping US citizens evade taxes. Legal risk could impact capital and higher-than-expected fines provide downside risk and vice versa.
  3. Poor Risk Management - with a lax approach to risk assessment and mitigation, leaving the bank exposed to potential threats.

Credit Suisse crisis has resulted in an optimistic outlook from crypto enthusiasts who believe the Federal Reserve may put interest rate hikes on pause. However, the interdependence between Bitcoin, cryptocurrencies, and the Federal Reserve’s monetary regime paints a more complex picture. In this blog post, we will explore crypto’s path out of the financial market uncertainty.

Recent Surge in Crypto Prices:

Despite the challenges in the financial markets, the cryptocurrency asset class has displayed remarkable resilience. On March 10, the Silicon Valley Bank (SVB) crisis caused Bitcoin to drop to $19,736.7, while Ethereum fell to $1,379.43. However, as of the press date, CoinGecko reports a 26.6% cumulative gain for Bitcoin and a 19.1% increase for Ethereum over the past week.

While some analysts, including James Butterfill of CoinShares, speculate that the surge in crypto prices reflects investors' growing distrust of the traditional banking system, the recent announcement by Binance, which plans to swap $1 billion of its BUSD stablecoin for Bitcoin, Ethereum, and Binance Coin (BNB), indicates that investors are exploring alternative investment opportunities.

https://twitter.com/Rewkang/status/1635998003017179136

The recent gains of Bitcoin notwithstanding, it continues to demonstrate a notable association with stock indices like the Nasdaq and S&P 500. This linkage is attributable to the monetary policies of the Federal Reserve, which have a bearing on the worth of both stocks and cryptocurrencies. The potential implications of the Fed's stance on interest rate hikes on crypto cannot be overemphasized.

The Fed's Next Move:

As far as the Fed goes, whether or not the central bank can balance financial stability with its fight against rising prices is core to crypto’s future. Putting hikes on pause would create a favorable environment for high-risk assets like Bitcoin to flourish. However, if the whole world adopts a risk-off mode, the price of crypto may follow downwards in the short term, because it is clear that rising rates can lead to a decrease in liquidity and an increase in borrowing costs for investors, which could dampen demand for riskier assets like crypto.

The Fed’s next move will come after its policy meeting scheduled to take place on March 22, 2023, expecting to announce its decision on interest rates at 2pm ET and a press conference at 2.30pm ET. The primary concern affecting the Federal Reserve's upcoming decisions is that inflation may not be declining as rapidly as anticipated. In the event that inflation remains stagnant, the Fed may consider two courses of action. Firstly, it could prolong its restrictive policy in anticipation of its eventual effect. Alternatively, it could increase rates further in the hopes of accelerating the decline in prices.

https://www.forbes.com/sites/simonmoore/2023/03/04/heres-the-schedule-of-the-feds-upcoming-meetings-and-what-to-expect/?sh=7985df9d5573


Conclusion

Looking ahead, the Fed's next move will be closely watched by investors in both the traditional financial markets and the crypto market. A pause or cut in interest rates could provide a boost to risk assets like crypto, while an increase in rates could pose a challenge to the nascent industry. Additionally, ongoing regulatory scrutiny will continue to shape the future of the crypto market, and firms in the space will need to navigate this landscape carefully in order to succeed.

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