Bitcoin’s 2-month High Buoys Crypto Sentiment

Bitcoin (^BTCUSD) today edged to a new 2-month high, reaching levels not seen since June.  Bitcoin is now up by +38% from June’s 1-1/2 month low.  However, bitcoin is still down by -65% from last November’s record high of 68,992 and is down by -47% on the year. 

Bitcoin and other crypto currencies have been able to recover somewhat in the past two months after the crypto-winter that began last November.  The crypto recovery has been driven in part by the recovery in the stock market seen in the past two months, which reflects the idea that the markets might have overdone their fears of the Fed and a recession, and that the worst of the bad news might have already been discounted.

Crypto is also benefiting from improved risk-on sentiment and retail participation in the markets, which has also been manifested in the revival of meme trading.  For example, Bed, Bath and Beyond (BBBY) has more than doubled in the past two weeks.

Yet, until the markets are sure that the Fed is done raising rates, the coast may not be clear for the stock market or the crypto market.  The markets are currently expecting the Fed to continue raising interest rates until the spring of 2023, but then pivot to easing with a -50 bp rate cut in the second half of 2023 and a further -50 bp cut by 2025.  Specifically, the markets are expecting the Fed in the coming months to raise the federal funds rate by another +129 bp to a peak of 3.60% in April 2023 (from the current effective federal funds rate of 2.33%), and then cut the rate by about 1 percentage point back to the neutral 2.50% level by 2025.

Of course, by the time the markets are sure that the Fed is done raising interest rates, the bulk of the gains in the stock and crypto markets will probably already have been seen.  Investors, therefore, currently appear to be trying to get in on the action before it’s too late.  As always, the timing will prove to be very tricky, with ever-present twists and turns ahead.

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