why btc is going up?

So you might expect cryptocurrency to plummet when a crisis of confidence hits the markets. Instead, leading crypto Bitcoin rose following the announcement that the U.S. government was insuring virtually all deposits at the troubled California bank and depositors would be whole.

Here’s why Bitcoin is surging amid the crisis and why one asset-backed stablecoin is falling.

As the bellwether for the sector, Bitcoin ran up about 18 percent following the news that regulators were insuring all depositors at Silicon Valley Bank and creating a fund to bolster others across the U.S. What’s going on with surging crypto prices? In a word: interest rates.

Cryptocurrency is a risky asset that trades on changes in the future direction of interest rates, similarly to how many growth stocks do. When rates rise, traders move away from risky assets, but when rates fall, they tend to move into riskier assets. Now they expect the torrid pace of the Fed’s rate increases over the past year will be slowing, if not stopping altogether.

“We believe this is actually a recognition of the underlying challenges we are seeing facing U.S. monetary policy,” says Gabriella Kusz, CEO, Global Digital Asset & Cryptocurrency Association.

The Federal Reserve has been pursuing a policy of rapidly raising short-term interest rates in order to tamp down inflation, which had been at multi-decade highs recently. Rising short-term rates have increased the funding costs of banks, hurt bond prices and put a lid on stock prices.

Crypto proponents see Bitcoin’s move as a sign of its stability and growing acceptance.

“As actors begin to understand the role which U.S. monetary policy, inflation and increases in interest rates have played in the current banking sector challenges, you are likely seeing a move towards Bitcoin and other forms of crypto as a reflection of their potential value as a hedge and alternative store of value during such times,” says Kusz.

But Bitcoin’s move may seem paradoxical, since investors seem more jittery and prone to run to “safe haven” assets such as U.S. government bonds in a crisis. After all, Bitcoin is a risky asset that’s not backed by hard assets or cash flow of an underlying entity, unlike stocks and bonds.

Crypto assets have been associated with a number of high-profile bankruptcies of late, including those of Celsius and BlockFi as well as the seeming fraud of crypto exchange FTX. Banks involved in fintech innovation such as Silvergate and Silicon Valley Bank have also been snared.

Another cryptocurrency was under pressure over the weekend, a so-called stablecoin called USD Coin, whose goal is to peg its value to the U.S. dollar and to maintain a value of $1. Such stablecoins are not intended to fluctuate in price, unlike almost all other cryptocurrencies. Typically, stablecoins maintain some hard assets such as actual dollars to back their value.

Following the shutdown of Silicon Valley Bank, USD Coin declined in value to less than $0.88 over the weekend, a dangerous situation that could lead to a run on that cryptocurrency. Traders were speculating that, after an initial statement from regulators guaranteeing a full return only for depositors with less than $250,000, the stablecoin might come under further pressure.

“USD Coin dropped off its peg because less than 10 percent of the backing was held in Silicon Valley Bank, and it was unclear whether or not that money would be returned,” says Aaron Rafferty, co-founder of BattlePACs and CEO of StandardDAO.

“Since Friday, however, the federal government and President Joe Biden have confirmed that depositors will have 100 percent security in redeeming their funds, so crisis averted…for now,” he says.

Since its fall, USD Coin has nearly recovered its full value, and trades just shy of its $1 peg.

It’s vital that those thinking about putting their money into cryptocurrency understand the risks of doing so, since it can be easy to gloss over the risks as well as how volatile crypto markets are.

The volatility of cryptocurrency markets can make even traditional stock markets look tame in comparison. Even so-called safe assets such as stablecoins can move significantly, as traders saw in 2022 with the spectacular blow-up of the UST stablecoin. When trading volatile assets, inexperienced traders can easily make mistakes and let their emotions get the best of them.

But volatility is only one part of the risk inherent in cryptocurrency. A more important risk is the lack of inherent value in most cryptocurrencies. They aren’t backed by the assets or cash flow of an underlying company, meaning that the only thing holding them up is the sentiment of other traders. In contrast, stocks are backed by the assets and cash flow of that specific company.

This lack of fundamental backing means that the only way to make money on crypto is to trade it to someone else who is even more optimistic about it. This is what’s known among investors as the “greater fool theory of investing,” and it’s why legendary investors such as Warren Buffett and Charlie Munger won’t touch it, and even have gone as far as saying it should be banned.

The price of the original cryptocurrency has been gradually rising since the collapse of Silicon Valley Bank, as crypto traders anticipate a potential pause in federal interest rate hikes. Ongoing strength in tech stocks and growth companies has also helped propel Bitcoin back above this threshold.

Overall market optimism as well as liquidations of short positions helped push Bitcoin past the $30,000 mark in the near term—BTC saw a gain of more than 6% over the last 24 hours.

The world’s largest cryptocurrency had languished below $30,000 since June 2022, more than 50% off its all-time high of more than $64,000 in November 2021.

Ethereum (ETH) has been gaining hand-in-hand with BTC. The world’s second largest crypto by market cap is preparing for the upcoming Shanghai upgrade. ETH is up approximately 3% over the last 24 hours, breaking through its the $1,900 barrier for the first time in almost a week.

At the March Federal Open Market Committee’s (FOMC) meeting, the Federal Reserve raised interest rates by a quarter of a percentage point to a range of 4.75% to 5.00%. This is the highest federal funds rate since 2007, and a range of Fed officials have suggested that there could be a pause in rate increases very soon.

The statement that accompanied the March Fed meeting was the first in months that had not explicitly said that more rate hikes would be needed, and risk assets have been celebrating ever since.

The tech-heavy Nasdaq Composite Index is up more than 16% year to date, while the Dow Jones Industrial Average is up only a little more than 1% over the same period.

This optimism in tech stocks has funneled into cryptocurrencies as well. Bitcoin is up more than 80% this year alone, while leading altcoins ETH and Binance Coin (BNB) are up more than 59% and 35% respectively.

Liquidations in short positions helped propel the bulls’ case even higher, fueling Bitcoin’s overnight rise. Since Monday, more than $150 million of Bitcoin short positions have been liquidated.

When short positions are liquidated, buy orders are typically triggered. This can add additional upward momentum to an already rising market.

The current rise in prices across the board on crypto has many crypto enthusiasts declaring “crypto winter” is over. The bull market has returned.

Since blockchain project Terrafrom Labs—and its corresponding TerraUSD and Luna coins—collapsed last spring, investors and traders believed the broader cryptoshpere was facing crypto winter, a period of prolonged price declines across a vast array of cryptocurrencies.

The big question facing investors now is whether this is yet another sign that the Bitcoin bottom is in or if the refuge is merely a dead cat bounce—where prices temporarily rebound amid a longer-term negative trend, only to resume the downward fall after that.

While the bounce has provided a welcome reprieve, the reality is that we are in unprecedented territory regarding a number of factors, including the geopolitical climate, economic indicators and the Fed’s relationship to interest rates.

In recent weeks Bitcoin's price has seemed to continue marching higher. But what is driving this growth? It turns out there are a wide variety of factors that continue to make Bitcoin rise in value.

Bitcoin has seen extremely volatile peaks and troughs in its time. Its last peak was near $14,000 in June of 2019. At this point, Bitcoin experienced a hard resistance and it failed to push through this stage.

If Bitcoin were to break through that resistance in June it would have likely triggered a bull market. Unfortunately, for Bitcoin bulls, it failed to do so and cascaded down to a low point of nearly $3,800.

In October, Bitcoin retested this resistance point only to fall back down. On November 4th, Bitcoin pushed straight through $14,000 and continued higher. This is significant because Bitcoin's next resistance point is its previous all-time high of $20,000.

With Bitcoin no longer having a theoretical resistance point until its previous all-time high of $20,000, many investors have become bullish that the cryptocurrency will be able to retest that price point or even push past it. This speculation has lead to an increase in Bitcoin's value.

Another reason for Bitcoin's rise is the growing inflation of the U.S. dollar. While inflation is on average 2% each year, recent stimulus spending is poised to greatly increase the level of inflation and decrease the dollar's purchasing power.

With the recent stimulus packages, the United States has added around $2.4 trillion to the economy. This has many worrying about the inevitable decrease in the dollar's purchasing power and the rise in inflation.

To hedge against this rising inflation, many have retreated from the dollar and have taken shelter in assets that historically have held value or have even appreciated in value. Typically, assets that people convert their dollars into to avoid inflation or volatile markets are ones that are scarce or are less volatile in general. These 'safe-haven' assets include things like precious metals, stocks in sectors that are generally less volatile, and more recently, Bitcoin.

Another reason for Bitcoin's price appreciation is its growing adoption as a payment method. Recently, PayPal (PYPL) announced that it would soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as a form of payment.

This news pushed Bitcoin's price higher immediately. PayPal has nearly 350 million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also has well over 20 million active merchants who can now accept the currency.

Aside from PayPal, this has further implications. PayPal also owns the widely popular payment app, Venmo. Venmo has more than 40 million active accounts, making the accessibility to Bitcoin and other cryptocurrencies even more significant.

While PayPal and Venmo are newer to crypto, there are a host of other applications that allow its users to buy, sell, and hold. Popular competitors to PayPal and Venmo, Square (SQ) and CashApp, also accept cryptocurrencies making the audience to Bitcoin even wider.

As discussed above, there is a growing narrative of Bitcoin as a safe-haven asset. In the current societal and economic climate there is a growing incentive to hold less cash and be hedged against intense market swings.

Recently, a trend started where publicly traded companies were beginning to convert cash in their treasuries over to Bitcoin as a more sound store-of-value. Most notably, MicroStrategy, a business analytics company, converted $425 million worth of cash in its treasury to Bitcoin. Shortly after the payments company Square made a $50 million purchase.

Since then, a number of companies have followed suit. The confidence that these companies and their investors have in Bitcoin has given increased merit to the concept of Bitcoin as a store-of-value and safe-haven asset.

Perhaps the most important reasons for the rise in Bitcoin's price are two attributes that are inherent in its design.

The first: there is only 21 million Bitcoin that will ever exist. There will be no more and no less and this number will always stay static. This makes bitcoin more scarce than anything that has come before it. Other scarce assets are not 100% finite and in some cases, they can be synthetically manufactured.

The second is a process coded into Bitcoin called the halving. Essentially, Bitcoin has its own built-in escrow mechanism where Bitcoin is released and given to miners as a reward for processing transactions. This reward is cut in half every four years.

By doing so, Bitcoin's rate of inflation is reduced by half each halving and its stock-to-flow ratio is doubled each halving. This process continues every four years until all Bitcoin in this escrow mechanism is released and in circulation. From that point on Bitcoin in circulation will be capped at 21 million. As of the time of writing, there are 18,534,818 in circulation.

So far, Bitcoin's price has followed its stock-to-flow ratio very closely and if it were to continue on this trajectory Bitcoin's value could be somewhere around $100,000 in late 2021.

Another reason for Bitcoin's rise is that as the size of mining network grows, so does the mining difficulty -- which, in turn, increases the marginal cost to produce a bitcoin. Bitcoin mining requires a great deal of energy, and this has a real cost that must be paid by miners in their local currency. Because Bitcoin's protocol mandates one block be found, on average, every ten minutes, the more hashing power directed at mining does not increase the rate of new supply - it only increases the difficulty of mining. Research has shown the the price of a bitcoin has closely tracked its marginal cost of production.

2020 returns -