Bitcoin is on pace to post its third positive month in a row and best quarter in two years after navigating its first banking meltdown and another regulatory crackdown, while investors weighed the possibility of a new environment for interest rates.
The biggest cryptocurrency by market cap has extended its 2023 rally finished the month up more than 22%, bringing its quarter- and year-to-date gain to more than 70%. It's also bitcoin's best quarter since the first quarter of 2021 – which marked the beginning of a big bull run at the time.
"The rally has continued in March even after recent bank closures," said Jeff Cantwell, an equity analyst at Wells Fargo. "While the rebound has more than one underlying reason, our conversations with investors have centered on three: crypto as a 'flight to safety' given banking turbulence; positioning (short covering); and a shift 'at the margin' by investors to 'risk on' as prospects of a Fed pivot have increased."
On Friday, bitcoin pushed higher by 2% at one point to retake the $28,000 level, which it first broke through earlier this week for the first time this year. It had dropped back below in a knee-jerk response by investors to the latest crypto crackdown by U.S. regulators, the CFTC's lawsuit against Binance.
Bitcoin was coming off a flat February but climbed throughout March as investors rediscovered its appeal as alternative banking system amid a global banking crisis. Even after the two most crypto friendly banks, Silvergate and Signature Bank, shut down, bitcoin rallied. They took key on- and off-ramps between fiat currency and crypto with them, however, and Cantwell said he expects that to affect liquidity in crypto until new entrants fill the gap.
Investors also shrugged off the "unhealthy regulatory environment" that persisted throughout March, as skittish regulators still recovering from the failure of FTX came down on Coinbase and Binance, after coming for Kraken in the previous month.
After spending much of the past two years trading in lockstep with equities, that correlation is now at its lowest since September 2021, while its correlation with gold, a traditionally "risk-off" asset, has risen.
"Bitcoin still seems to be in a favorable light, but only if growth stays healthy as well," said Callie Cox, an analyst at the investment company eToro. "A recession could still pressure crypto prices considering it's still such a retail-dominated asset, and high rates are still an obstacle."
At its March meeting, the Fed raised rates another quarter percentage point but indicated that its hiking campaign could soon be over. Some traders are now expecting the Fed to hold its benchmark interest rate at current levels, with some forecasting lower rates as early as July, according to CME Group's FedWatch tool. That could remove a big macro headwind for crypto.
"The banking news narrows the gap for a soft landing, and increases the chance of seeing an extreme scenario in either direction," Cox said. "For now, it's anybody's guess how crypto weathers either extreme scenario – a recession or persistently high inflation."
"We're seeing signs of some buying exhaustion, too – flows out of crypto exchange-traded products, bad reactions to good news," she added. "Crypto investors should still tread carefully. Bitcoin's strong streak this year isn't necessarily a green light to pile back in."