After a brutal year for cryptocurrencies, 2023 is shaping to be a lot more positive for Bitcoin and other popular digital coins. The rally coincides with a similarly impressive bounce back on Wall Street, where many downtrodden tech and growth stocks have been enjoying a revival of late. But how much of this revival was conditional on the expectation that the Fed’s tightening campaign will end sooner rather than later, and can the rally survive if rates rise above 5%.

Deciphering the Fed

Bitcoin hit a five-month high of $24,258 last week after Fed Chair Jerome Powell suggested that the process of disinflation has already begun in the US economy. Although Powell and his colleagues have also been busy reiterating in recent days that several more rate hikes will be needed to fully bring price pressures under control, markets see this as the clearest indication yet from the Fed that the fight against inflation has reached a turning point.

However, the ratcheting up of rate hike expectations on the back of the stellar January jobs report, which came after the FOMC meeting, has taken the steam out of the rally. Markets may have also jumped the gun when interpreting Powell’s comments about disinflation as it is quite different from saying that the inflation threat has dissipated.

Crypto bounce fades faster than stock rebound

Yet, financial conditions have continued to ease despite Fed fund futures going in the opposite direction and getting into line with the Fed’s own projections. Moreover, stocks on Wall Street keep displaying an incredible propensity to bounce back after each knock and they’ve maintained some buoyancy even after the latest repricing by the markets of expected Fed rate hikes.

On the other hand, cryptocurrencies seem to be struggling to restore positive momentum and some further consolidation might be necessary for refuelling before embarking on the next upleg. Bitcoin and other major cryptos such as Litecoin and Ethereum boast year-to-date gains of between 30-40%. But this is a fraction of the losses they’ve incurred from the record highs scaled in 2021.

A long road to recovery

For instance, as impressive as Bitcoin’s more than 50% rebound has been since November, it has not yet reached the 23.6% Fibonacci retracement of the downtrend from the all-time high of $69,000 from November 10. The 23.6% Fibonacci falls around $28,100, suggesting that a climb above $28,000 is essential to boost the prospect of a longer-term recovery in the price. But in the near-term horizon, the $25,000 level is a more realistic target for the bulls.

Bitcoin posts golden cross

If, though, Bitcoin continues to lose momentum, a crucial support zone could form between $21,000 and the 50- and 200-day moving averages (MA) right below it. The price has already slipped below the 20-day moving average, breaching the $23,000 level, in a further sign that the consolidation phase is not over.

In defence of the bulls, the 50-day MA has just crossed above the 200-day one for the first time since September 2021. Though, it’s worth pointing out that a golden cross is known to be a lagging indicator and so this in itself is not enough to endorse a sustained uptrend.

Regulatory headaches

Another argument for dismissing the golden cross for the time being is the fact that regulators appear to be stepping up their scrutiny on the crypto market following the FTX fallout and this has investors worried.

Kraken is the latest cryptocurrency exchange being investigated by the SEC for violating securities rules. It comes hot on the heels of the SEC’s charges in January against Gemini, another crypto exchange, and Genesis, a crypto lender that has since filed for bankruptcy. Moreover, stablecoin issuer Paxos is being investigated by the New York Department of Financial Services.

What has investors most concerned about the crackdowns post the FTX scandal is that they seem to be targeted at making it difficult for the crypto industry to gain access to the US banking system. If these rumours become more substantiated over the coming weeks or months, 2023 may not turn out to be a better year for cryptos after all.