The cryptocurrency market was on fire this week as nearly every major token jumped in value. A rising stock market, falling inflation, and dropping interest rates have all been tailwinds, but there was some potentially positive industry news as well.
According to data provided by S&P Global Market Intelligence, in the last seven days, Bitcoin (BTC 2.81%) is up 13%, Ethereum (ETH 0.17%) has jumped 12.8%, and Solana (SOL 2.16%) has risen 27.5% as of 9:45 ET on Friday morning.
I’ll start with the macro environment because that’s the biggest factor here. Consumer Price Index (CPI) data showed that inflation is easing and was actually negative month over month in December 2022. That has caused the market to assume that the Federal Reserve will stop raising rates as quickly as it has over the last six months and may even be forced to lower rates to prevent deflation. Interest rates have fallen in reaction to this data and stocks are rising. As an asset class that often trades in unison with the stock market and growth stocks, it’s no surprise to see crypto popping this week.
Within crypto, FTX’s liquidators say they have recovered $5 billion of assets, including cash and cryptocurrencies. The court has asked them to complete returning funds to customers by March 15, 2023, but FTX’s CFO Mary Cilia had previously estimated it could be done by April. Either way, the unwinding of FTX appears to be going more quickly than many outsiders expected, which could be bullish for both FTX customers and the broader industry.
Solana specifically has been hurt by FTX’s bankruptcy because Sam Bankman-Fried, FTX, and Alameda Research were large investors in the cryptocurrency. The tokens held are locked as part of an early funding round, but much of the dark cloud FTX left over Solana is lifting and transaction volume and non-fungible token (NFT) prices were both increasing over the past month.
Ethereum’s next upgrade, known as the “Shanghai Hard Fork,” has also been seen as bullish because it will unlock tokens that have been locked and inaccessible for months.
Like many moves in cryptocurrency, short-term moves are driven more by the stock market and crypto narrative. The second half of 2022 was terrible because growth stocks were falling, interest rates were rising, and there were a number of bankruptcies and frauds in crypto. For now, the narrative has changed as investors are buying risk assets once again.
The biggest risk to keep in mind is the opaque nature and potential risk that Binance, the largest crypto exchange in the world, faces. Auditing company Mazars, which previously did proof-of-reserves reports for Binance, cut ties with the company and Binance has yet to prove that it has the assets it says it does. FTX did the same thing, so it’s worth being skeptical because there’s no verification of what Binance holds.
Long-term, I’m bullish on the crypto industry and the disruption it’s bringing to the world, but there may be more risk and price drops ahead. Even if the crypto winter is coming to an end, the market won’t recover overnight.