2 - 4 minute read
The first quarter of 2023 has been monumental for the world of cryptocurrency, with Bitcoin posting its best quarterly performance in over two years, gaining 68% over the three-month period. The CoinDesk Market Index (CMI) has also seen a 58% increase with Ether and Cardano both rising significantly, up 50% and 57%, respectively.
The COVID-19 pandemic played a significant role in driving crypto adoption as mainstream finance institutions faced challenges with lending and providing liquidity to their clients amid national lockdowns. These challenges sparked positive sentiment around crypto’s potential as a viable alternative to traditional finance.
The positive sentiment surrounding digital assets has continued to grow, resulting in crypto decoupling from traditional asset classes such as equities and bonds. The digital assets continued to thrive even with concerns around inflation and quantitative-tightening at the Federal Reserve, further indicating potential for growth.
The focus on digital assets’ intrinsic value continued to diversify investor portfolios both in the retail and institutional sectors. However, the liquidity in crypto markets continually waned, as trading volumes and regulatory action against exchanges have created additional barriers to capital entry in the digital-asset market.
The regional bank jitters and Federal Reserve continuing to expand its balance sheet amid global economic crises have further driven investors to cryptocurrencies. For instance, Bitcoin’s 25% gain during the regional banking crisis has been partly attributed to the rapid steepening of the yield curve in the bond market.
The move of investors out of banking deposits and into front-end Treasuries for corporate treasury risk-management purposes has been a major factor contributing to this trend. With investors ditching deposits in regional banks, the market views the collapse of Silicon Valley Bank (SVB) as a pivot in the interest-rate hiking cycle with significant consequences.
Digital assets’ decoupling from traditional finance institutions will likely continue to gain momentum, creating opportunities for investors seeking alternatives to equities and bond markets. However, traders must be cautious when investing in crypto markets, given increased regulation and market volatility.
The Bottom Line
Crypto has demonstrated its resilience thus far, with strong first-quarter performances for Bitcoin, Ether, and Cardano, among others. The continued decoupling from traditional asset classes presents a viable opportunity for traders, but at a heightened level of risk amid evolving regulatory landscapes and significant market volatility.