Three reasons Luke Lango expects more bullishness for Bitcoin … banking chaos, a dovish Fed, and growing risk-on appetites … PacWest drops again … year-to-date performance for top cryptos
As I write Thursday early-afternoon, regional bank PacWest is down 26% on news that its deposits declined 9.5% during the week of May 5.We’ll return to this in a moment, but let’s pivot to a topic that might appear unrelated at first…Bitcoin.As you can see below, the grandaddy crypto has been rangebound since mid-March.
The question now is “will it break out to the north or south?”Well, yesterday, Bitcoin climbed after the CPI report showed continued progress on inflation. Today, it’s down slightly as the PacWest bank news has investors on edge.While headlines will certainly push Bitcoin’s price around in the short-term, what we want to know is where it’s headed over the longer-term. Fortunately, the influences that dictate this outlook are growing increasingly bullish.So, what are they?In his latest Crypto Investor Network update, our crypto expert Luke Lango identified three:One, the continuing regional banking crisis.Two, a dovish evolution in Fed policy towards a pause.Three, a general return to risk-on sentiment in financial markets.Put them all together, and here’s Luke’s bottom-line:
Importantly, we expect all three tailwinds to persist for the balance of the year and therefore believe cryptos will stay in “rally mode.”
Let’s look at each one.
Watch out for more banking contagion, which brings us back to PacWest
Before we jump into the details, for newer Digest readers, Luke is the analyst behind Crypto Investor Network. While this newsletter focuses on cutting-edge altcoins, Bitcoin remains the barometer of the crypto sector. In general, its trend sets the momentum direction for the broader altcoin world. So, to get a sense for where the sector is heading, Bitcoin gets the spotlight.Now, Bitcoin is off to a fantastic start this year. It’s up roughly 10X the returns of the S&P (about 66% compared with about 6%). But if Luke’s right, there are still plenty more gains to come.As to why, let’s pick up with his first highlighted tailwind – banking chaos. Keep in mind, Luke wrote this before this morning’s PacWest fireworks:
It has become abundantly clear that the regional banking crisis is not over, and that dozens of regional banks may fail when all is said and done.[Last] week, we saw the near-failure of two more regionals – First Republic and PacWest. In the past two months, four major regional banks have now either failed or nearly failed.Cryptos were invented as a replacement to banks. Theoretically, when banks fail and consumer confidence in the U.S. banking system wanes, that should boost cryptos. We are seeing that happen right now.
As noted earlier, PacWest shares are down big as investor fears yet another bank will fail due to a run on deposits.Now, PacWest management reports that is has the liquidity to meet these withdrawal requests. But if fears snowball, resulting in even more requests, will it be able to meet those additional requests?This is the classic “bank run” that can topple an institution, except there’s a twist…Whereas a depositor had to stand in a long line to receive his/her bank savings in prior years, today, a few clicks can do the job. This just accelerates the potential damage when fears of a bank failure spread.
Beyond just PacWest, we share Luke’s broad concern about the banking sector
In our Tuesday Digest, we analyzed the weakness, concluding that it’s far too early to declare the crisis is behind us.As a broad summary, here’s The New York Times:
Yes, you should be worried about a potential bank crisis…Our nation’s banking system is at a critical juncture. The recent fragility and collapse of several high-profile banks are most likely not an isolated phenomenon.In the near term, a damaging combination of fast-rising interest rates, major changes in work patterns and the potential of a recession could prompt a credit crunch not seen since the 2008 financial crisis.
By the way, on Tuesday, legendary investor Louis Navellier held an urgent briefing to explain this escalating weakness in the banking sector, why the trouble isn’t over, and how to protect both your savings and your investments. Keep in mind, Louis is a former banking regulator, so he has a unique insight into this growing toxicity. To watch a free replay of the event, just click here.Returning to Luke, here’s how he sums up this point on banking:
We think many more regional banks will collapse before this saga is over. Therefore, we think cryptos will continue to benefit from the regional banking crisis in the coming months.
The Federal Reserve’s continued evolution toward dovishness
Last week, the Fed held its May FOMC meeting and intimated that it won’t be hiking rates in June.Here’s Luke with those details:
We learned [last] week that the Fed is going to pause its rate-hiking campaign in June.Of course, they didn’t explicitly say that on Wednesday. They can’t. But they did do everything short of explicitly saying it.They coughed, winked, and nudged, with all their rhetoric and communication strongly suggesting that Wednesday was their last rate-hike in this cycle.The “Fed Pause” is here.
Wall Street traders agree. We can see this by looking at the CME Group’s FedWatch Tool that survey traders about their expectations for coming interest rate levels. As I write Thursday, the probability of a pause in June sits at a whopping 99.1%.Back to Luke:
[A Fed pause] is supremely bullish for cryptos. The last Fed Pause in early 2019 meaningfully accelerated the Third Crypto Boom Cycle. We believe this Fed Pause in mid-2022 will meaningfully accelerate the Fourth Crypto Boom Cycle.
But why is a Fed pause is good for Bitcoin?Well, for one, remember that investors have plenty of options for their investment capital. When interest rates are high, “risk free” assets can pay yields that are very attractive to certain investors (for example, a two-year Treasury pays nearly 4%). This can lure money away from assets like Bitcoin that don’t offer a yield.So, when rates pause, that’s the necessary next step toward an eventual rate-cut that will diminish the attractiveness of yield-paying assets.Additionally, many of the projects in the digital, altcoin world are bootstrapped and require debt funding. When interest rates are high, it’s a brisk headwind against profitability. So, when rates pause (which, again, hints at an eventual rate-cut), it promotes optimism about upcoming economic conditions.Since investors always position their money for “what’s on the way,” a rate pause often acts like a starting gun for investors who want to get ahead of eventual rate-cuts.And this dovetails into Luke’s final point…
Investors are growing more comfortable with risk
Back to the Crypto Investor Network update:
Lastly, investors are just generally growing more risk-seeking in 2023.Inflation is falling. The Fed has grown more dovish. The economy is proving resilient. Those macroeconomic factors have turned investors fearful of the Fed walking the economy into a recession, into investors hopeful for a soft landing.Risk-on sentiments have returned to markets.
To illustrate, Luke highlights the strong performance of technology and growth stocks here in 2023.In fact, the tech-heavy Nasdaq is about to enter a new bull market, as defined by being up 20% from its most recent low. Here’s how that looks.
By the way, I should note that Luke’s core portfolio in his tech-focused Innovation Investor service is up 27% on the year (as of yesterday). That’s yet another indicator of this tech strength.Back to Luke:
This [tech bullishness] is bullish for cryptos because, over the past several quarters, Bitcoin has just acted like a major tech stock. The price trajectory of the Nasdaq and Bitcoin mirror each other going back to 2021.
We expect risk sentiments to meaningfully improve over the next several months, and therefore, believe we will get a “rising tide lifts all boats” situation in financial markets. We think the fastest-rising boat in that tide will be cryptos.
A snapshot of overall market strength
Before we wrap up, let’s take a look at the performance of some of the biggest/most-owned cryptos here in 2023. As you can see, it’s a strong performance.Bitcoin – 66%Ethereum – 53.7%BNB – 27.6%XRP – 26.6%Cardano – 49.6%Solana – 110.0%Polygon – 15%Polkadot – 26.6%But if Luke’s right, this is just the beginning. To learn more about joining him in Crypto Investor Network, click here.Here’s Luke to take us out:
Overall, we are very optimistic about the outlook for cryptos.The fundamental factors which most strongly influence crypto prices are meaningfully improving and project to keep improving for the foreseeable future. This supports further strength in crypto prices.The technicals also support further strength, with Bitcoin continually showing support exactly where it needs to show support to preserve the 2023 technical uptrend.Consequently, we continue to emphasize a “buy-the-dip” strategy to the crypto markets in 2023, with dip-buying efforts focused on the cryptos in our portfolio.
Have a good evening,Jeff Remsburg
