Bitcoin Price Surpasses $26,000 Thanks to Inflation Subsidy

Earlier today, the bitcoin price topped $26,000 in one of its biggest one-day gains over the past few months. The price of bitcoin rose from $21,700 on Monday to a multi-month high of $26,264 today, a gain of more than 20% in about 30 hours.

The last time Bitcoin traded this high was more than nine months ago in June of last year. So, what is the reason for Bitcoin to skyrocket in such a dramatic way? let’s see.

Why is bitcoin going up today?

Several factors have contributed to Bitcoin’s massive move into the green zone over the past few days, including a USDC re-pegging, the release of encouraging inflation data, and a potential reversal in the Fed’s interest rate strategy. We’ll examine each of these in the following sections.

Dollar Coin Drama and Stablecoin Liquidity Shift to Bitcoin

The price of USD Coin, a stablecoin whose price should always follow a 1:1 peg to the U.S. dollar, fell below $1 on Saturday. The reason is simple — Silicon Valley Bank, one of the largest holders of Circle’s (USDC’s issuer) cash reserves, declared a serious liquidity problem. The news casts doubt on Circle’s ability to convert USDC into dollars, with many investors rushing to convert their USDC into other assets.

In addition to USDC, several other stablecoins (many of which had USDC as collateral), including DAI, GUSD, and USDD, also lost their $1 peg. USDC bottomed out at around $0.88, but the coin has since successfully re-pegged.

A significant portion of stablecoin holdings are converted into Bitcoin, Ethereum, and other Crypto assets. This liquidity shift could be a big reason for Bitcoin’s rise. It also shows that many investors view bitcoin as a safe-haven asset during a broader market downturn.

Notably, decentralized exchanges saw a huge spike as traders swapped their USDC. For example, Uniswap had its largest trading day in history on Saturday, reaching $11 billion in 24 hours (about 5% of Nasdaq).

Core inflation rose 5.5% year-on-year but cooled quarter-on-quarter

The U.S. Bureau of Labor Statistics released a new inflation report earlier today, recording changes in the consumer price index (CPI) over the past year. The CPI for all items rose 6% over the past 12 months, while the core CPI rose 5.5%, the report showed. Meanwhile, inflation cooled in February compared to the previous month, falling to 0.4% in February from 0.5% in January. In other words, the pace of inflation growth has slowed.

The report said that the biggest reason for the low inflation rate in February was housing, which accounted for 70% of the increase in CPI. The Bureau stated:

“The All Items Index rose 6.0% in the 12 months to February; the smallest 12-month gain since the end of September 2021.”

The end of the rise?

The recent problems in the U.S. banking industry, led by Silvergate Bank and Silicon Valley Bank, have led many investors to believe that the Federal Reserve may temporarily suspend rising interest rates and even begin to cut benchmark interest rates.

According to some reports, Silvergate and SVB’s collapses were largely due to the banks’ exposure to long-dated Treasuries during the coronavirus pandemic, and their value falling after the Fed started pumping them up. Since the main part of banks’ assets is government bonds, they cannot provide sufficient liquidity when investors want to withdraw their deposits. Not only that, but due to high interest rates, banks were forced to switch their bond portfolios at a loss.

The Fed is expected to pause its hike after another 25 basis point hike in March amid heightened concerns about systemic risks in the banking sector and questions about other banks’ exposure to long-dated bonds. According to the CME FedWatch Tool, some investors don’t think the Fed will raise rates at all in March, with rates remaining in a range of 4.50-4.75%. One of those investors is Goldman Sachs (GS), which says that “recent stress in the banking system” will cause the Fed to reconsider its stance on the upcoming rally:

“Given the recent stress on the banking system, we no longer expect the FOMC to rise at the March 22 meeting, as there is considerable uncertainty about the path beyond March.” – Goldman Sachs

We’ll have to wait until the next Fed meeting on March 21 and 22 to see what the central bankers decide.

Meanwhile, a reversal in central bank hawkish monetary policy could be a major positive for bitcoin and other cryptocurrencies. After all, cryptocurrencies have largely benefited from the low and near-zero interest rate environment that began after the 2008 crisis and continued until last year.

Wrap Up: Climax of Macro Effects Helps Bitcoin Hit Nine-Month High

A pause in gains, modestly improving inflation conditions, and a shift of funds away from stablecoins have helped fuel Bitcoin’s rally over the past few days. While Bitcoin looks like a good investment right now, it is important to note that the market is extremely volatile and anything can happen in the short term.

However, if you are investing in cryptocurrencies for the long term, Bitcoin offers significant upside and the potential for future price growth. In fact, our algorithmic price prediction algorithm predicts that Bitcoin will cross the $100,000 mark in early 2024, coinciding with the Bitcoin halving, one of the most important events in the cryptocurrency industry and – at least historically – the most One of the important price drivers.

Information source: compiled from COINCODEX by 0x information.Copyright belongs to the author, without permission, may not be reproduced

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