Bitcoin rose to $55,000, nearly five months high, on Wednesday. Institutions joined the rally to ride the wave.
According to Coin Metrics, the cryptocurrency traded 7.6% lower at $54,873.02 (Cash Metrics). Ether also rose 2.8%, to $3,575.73.
Bitcoin reached $55,499 in the previous session. It is up 13% for this week and 87% for the entire year, creating immediate profit for lots of investors.
The rally is occurring amid a number of small developments in Washington, D.C., which have provided some comfort for institutional investors looking to get into cryptocurrency.
Matt Hougan, chief investment officer at Bitwise Asset Management said that regulatory uncertainty is what keeps investors from the market. It’s the main driver of the next great bull market for crypto.
Bitwise surveyed financial advisors and found that regulatory uncertainty is the biggest obstacle to them making crypto allocations. Hougan stated that the majority of results have been the same for three consecutive years.
In a hearing before the House Financial Services Committee, Gary Gensler, Chairman of Securities and Exchange Commission, stated that he does not plan to ban cryptocurrency and that it would be up to Congress to decide whether or not to.
Gensler’s remarks mirror those of Jerome Powell, Federal Reserve Chairman, who also stated Friday that he does not intend to ban cryptocurrency.
Hougan said that “every major U.S. regulatory agency declared this summer that they needed to establish a new regulatory system around crypto.” “That created a lot of uncertainty in investors’ minds. They were hesitant about allocating without knowing the range of options. We are rallying because the most extreme left tail of following China’s path was eliminated by Gary Gensler and Jerome Powell.
The herd mentality
Noelle Acheson, Genesis’ head of market insight, stated that Wednesday’s price action was different than previous years this year and that all indications point to it being institutionally driven.
She said that institutional investors are like a herd and chase momentum. They start to wonder what they will miss if they have this type of momentum. Do I think my performance will be worse than my competitors’? Perhaps I should just get in on that.”
She pointed out that Bitcoin has been among the top five digital assets in terms of performance over the past 24 hours. This is something Acheson has never seen before. Top performers are often smaller altcoins or DeFi assets. Acheson stated that Bitcoin is the institutional gateway to crypto. When it’s among the top performers, it’s a sign that institutions are coming.
She said that when the price of oil jumps sharply, it is common for short positions to get liquidated. However, Wednesday was different.
Acheson stated that the price rose 3.5% in five minutes. This is big spot buying, even without liquidations.
The CME was another important signal.
Acheson stated that Wednesday’s basis spread, which is the difference between the spot and bitcoin futures prices, was the largest of all the exchanges. It was “unusual,” she said because the CME basis is usually lower than the other exchanges. CME is currently the only crypto derivatives trading exchange that has federal oversight. She said that it offers the lowest leverage and therefore may not be the most popular choice for traders and hedge funds looking for leverage.
The macro backdrop
Stocks were also falling due to investor anxiety about rising rates, higher inflation, the state of the economy reopening, and the debt limit. Bitcoin is not a safe-haven investment. Its price has fallen with the stock markets several times before, but many still consider it to be such an asset. This was evident Wednesday amid turmoil in the equity market.
“The Janet Yellen conversation yesterday was a major reason for buying bitcoin,” CNBC’s Jim Cramer stated Wednesday morning on ” Squawk on The Street.” “If we parse her words and it becomes true, then the dollar doesn’t seem as valuable as cryptocurrency.”
Yellen warned Tuesday that U.S. inflationary pressures could continue for many months and that the U.S. should fully anticipate a recession if their debt limit isn’t lifted within the next two weeks.
“We’ve seen cryptos behave like a hybrid somewhere between commodity and currency,” Morgan Stanley Wealth Management chief investment officer Lisa Shalett said to “Squawk on the Street.”