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It has been two months since I wrote "Start of the bull market or a bear market rally?" In this piece, I talked about the echo bubble - a smaller bubble that occurs after the bursting of a larger bubble - predicted by GCR.
Regardless of whether we are in an echo bubble or a new, larger bull market, the Bitcoin chart looks extremely bullish. Last week, the price corrected from $25k to the important support level around $19.5k.
The subsequent bounce was so strong that it seems like a rise to $32k and possibly much higher is on the table.
However, with a recession looming, interest rates at their highest point in 15 years, inflation significantly above 2%, and several banks in the US collapsing, a larger rally for Bitcoin may seem unlikely.
But it's not necessarily out of the question.
Over the past year, the Fed has rapidly increased interest rates in an effort to fight inflation. But they did it so aggressively (see chart) that the effects of the increases were often barely felt before the next rate hike followed.
And with the debt burden higher than ever (as seen in a chart), it was only a matter of time before this rapid rate increases would lead to problems.
And those problems did indeed come to surface last week. After some VC’s advised startups to withdraw their money from from Silicon Valley Bank, a bank run occurred.
The bank didn't have enough liquid funds to meet all the withdrawals and had to sell a significant portion of its bonds. But when interest rates rise, bond prices fall, and thus Silicon Valley Bank had to take a large loss on the sale of these bonds.
This ultimately led to the bank's bankruptcy.
Earlier that week, crypto bank Silvergate also closed its doors for similar reasons, and after the panic surrounding Silicon Valley Bank, a similar situation arose at Signature, which also had to shut down later that week.
In a short period of time, three American banks failed, and fears arose that the panic would spread to a larger part of the banking sector.
To prevent this, the US government intervened yesterday by guaranteeing all deposits at Silicon Valley Bank and Signature.
This raises the question for investors of whether the Fed can continue its fight against inflation, given that its high interest rate policy is causing problems for banks.
This is the main reason why Bitcoin (and gold) performed so well this week.
Gold - and possibly Bitcoin due to the digital gold narrative - generally performs well when real interest rates fall (real interest rate = inerest rate - inflation).
If the Fed is indeed forced to choose saving the economy over fighting inflation, then the expectation is that the real interest rate will drop significantly.
The Fed will make its next interest rate decision on March 22nd, and that will reveal where its biggest priority lies. If the Fed chooses to reverse its policy, then prepare for the next bullrun!
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