The global financial crisis and the ensuing political response have put macroeconomic considerations back in control of the digital asset markets.
- Despite the banking crisis, the government’s response, and the Fed and Treasury’s diminished confidence, digital assets are booming.
- Last week, downloads of cryptocurrency apps increased by 15% while those of banking apps decreased by about 5%.
- In its most recent investor alert, the SEC urged investors to exercise caution when purchasing digital assets.
- Banks have been quite reluctant to support a sector that is attempting to drive them out of business, even though stablecoin issuers still rely on them to maintain their reserves.
Effects of Macro Factors on the Digital Asset Markets
In light of the banking crisis, the government’s response, and the Federal Reserve and Treasury’s diminished credibility, macro considerations are again taking center stage in the markets for digital assets. Although digital assets are doing well, macro investors are adopting recessionary strategies.
Macro investors are reverting to the recessionary playbook even as digital assets are rising. A record high is getting closer and closer to gold. Crude oil is currently smoking. While defensives outperform, cyclical, small, and growth companies underperform large caps and value stocks. Falling rates are supporting the value of technology.
The Federal Reserve and Treasury Losing Credibility
The American Federal Reserve needs to improve its credibility. It is already a dramatic change that the two-year Treasury yield has dropped from a month-high of 5.08% to its current yield of 3.75%. The Federal Reserve’s decision to increase its benchmark rate by 25 basis points (bps) to 5% simultaneously makes it much more striking. That is the market’s way of saying it is calling the Fed’s bluff.
Also, the credibility of the Treasury Department has declined. Treasury Secretary Janet Yellen is torn between providing full support directly or avoiding moral hazard after joining the Federal Reserve and the Federal Deposit Insurance Corporation in their explicit defense of depositors of a small number of bankrupt regional banks. Yellen has changed her mind several times about raising deposit insurance over the past three days.
The Impact of the Banking Crisis on the Digital Asset Markets
With the Fed out of control, the Treasury secretary out of touch, and the global banking crisis continuing, it may not be surprising that more people downloaded cryptocurrency apps last week than banking apps, which saw a 5% dip. A renewed interest in a viable alternative indicates that the market is losing faith in our government and financial institutions. This is ironic, given that the SEC’s campaign against digital assets is co-occurring with the rise in crypto usage.
The Friction Between Banks and Stablecoin Issuers
Banks have been reluctant to support a sector attempting to drive them out of business, even though stablecoin issuers still rely on them to maintain their reserves. The fundamental issue is that stablecoin issuers benefit significantly from higher rates since they can keep all the interest.
Macroeconomic factors are once again moving the markets for digital assets. Digital assets benefit at the expense of other asset classes due to the banking crisis and the ensuing governmental reaction, which have taken center stage. A renewed interest in digital assets as a viable alternative has arisen due to the Federal Reserve and Treasury losing their credibility and the accelerating global banking crisis. Yet, the conflict between stablecoin issuers and banks continues to be a significant problem that requires attention. It is still being determined how the banking crisis and the subsequent legislative responses will impact the sector in the long run as macro factors continue to influence the markets for digital assets.