Will Systemic Risks Make or Break Bitcoin in Q2?

Bitcoin Q2 Fundamental Outlook

Bitcoin prices enjoyed a 60% rally in the first quarter, allowing the largest cryptocurrency to recover a fair portion of last year’s losses. As fears of financial instability continue to drive risk sentiment, Bitcoin prices have surged and could continue to be driven by the same systemic risks in the second quarter.

In Q2 of 2023, the main factors to watch are:

• Recession fears (rising risks of a recession could be a major headwind for speculative assets if the banking sector regains confidence).
• Inflation and monetary policy (ECB and the Federal Reserve have reiterated their intention to raise rates in inflation remains elevated).
• Financial regulations imposed on digital currency and a potential Lawsuit between the SEC (Securities Exchange Commission) and Coinbase (one of the largest crypto exchanges). Depending on the developments and the outcome, this could be another risk factor to monitor closely.

Will Systemic Risks Make or Break Bitcoin?

After a strong start to 2023, prices rallied nearly 40%, before settling at a key level of technical resistance around the September 2022 high of $22,781. As Fed expectations continued to drive sentiment, a robust labor market and persistently high levels of inflation opened the door for the Federal Reserve to consider raising rates more aggressively.

Stocks, commodities, and cryptocurrencies, to a certain extent, do not earn interest, so a high-interest rate environment does not bode well for these non-yielding assets. After a series of aggressive rate hikes throughout 2022, markets had expected the pace of monetary policy tightening to ease. However, as the Fed and the ECB remained fixated on fulfilling the objectives of the dual mandate (to achieve full employment and price stability), inflation remained well above the 2% target. This caused both major central banks to consider hiking rates more aggressively to tame price pressures.

Source: Refinitiv

Will Contagion from the Banking Crisis Continue to Support Digital Assets?

However, following the collapse of SVB (Silicon Valley Bank), Signature Bank, and the ongoing problems at First Republic Bank, pressure mounted on the Fed to consider pausing its rate cycle.

Although the financial sector remains vulnerable to contagion that could result in an increase in the number of bank failures, the probability of additional rate hikes has been reduced. Instead, many expect the Fed to announce rate cuts by the end of the year.

Source: Refinitiv

As a result, the combination of the eroding credibility of the banking sector, a weaker US Dollar, and a potential Fed pivot has boosted the appeal of digital assets. As Bitcoin and its major counterparts continue to monitor the geopolitical backdrop, fundamentals will likely remain as the primary catalyst for price action. With prices currently trading at their highest level since June last year, both technical and fundamentals could assist in driving the prominent trend.