Bitcoin drops as crisis wanes

Bitcoin and Ether both experienced losses to start the week and new month, as investors speculated that the takeover of First Republic Bank could mark the end of the financial crisis. According to Coin Metrics, Bitcoin fell about 4.2% to 28,137.76, while Ether lost 4% to 1,828.81. The price of bitcoin rallied in the final week of April as troubles at the bank unfolded.

On Monday, regulators took possession of First Republic, making it the third US bank failure this year and the largest since the 2008 financial crisis. JPMorgan Chase will acquire most of its deposits and assets. Trading of the cryptocurrency has been volatile, with investors trying to weigh the impact of the banking crisis on crypto, high inflation, Federal Reserve policy, potential recession, and an increasingly bearish narrative on the US dollar.

“It’s unclear whether the banking crisis narrative can continue to be a boon for bitcoin,” said Alex Thorn, head of firmwide research at Galaxy. “Overall, the market lacks clear positive near-term catalysts, with supply issues overhanging bitcoin … That being said, bitcoin accumulation by small addresses is outpacing issuance, and we expect Ethereum staking to increase, each of which provides a supportive supply narrative.”

Despite a slowdown from bitcoin’s first-quarter rally, cryptocurrency is still on an upward trend and has gained around 70% this year, after finishing down more than 60%. Thorn believes that both Bitcoin and Ether started 2023 at an “inorganically cheap” level, which allowed plenty of room for them to move higher off a low-base effect. A widening banking crisis became evident in March and the contrast with Bitcoin’s transparent and decentralized nature provided a further boost for bitcoin, while Ethereum’s successful Shanghai upgrade provided a catalyst for Ethereum.

Investors will be keeping an eye on the macro environment in the second half of the year, which is expected to be characterized by tightening, recession, and an expanding multipolarity in the global economy, all of which could support gold and bitcoin, according to Thorn. However, the market lacks clear positive near-term catalysts and supply issues are still overhanging bitcoin. Meanwhile, bitcoin accumulation by small addresses is outpacing issuance, and Ethereum staking is expected to increase, both of which provide a supportive supply narrative.