Bitcoin and most major cryptocurrencies are set for their best weekly performance in 2023, piercing through key price zones amid a constantly changing macroeconomic backdrop, which currently seems to be favoring digital assets. The king of cryptocurrencies posted a fresh nine-month high on Friday and it is up more than 50% year-to-date despite the recurring failures of crypto-related firms and increasing regulatory oversight. Is this the beginning of a new bull market?

Bitcoin gains as banking system trembles

Bitcoin prices experienced a setback in early March after the collapse of Silvergate Capital, Silicon Valley Bank and Signature Bank, which were considered some of the biggest lenders to the crypto space. However, the sentiment quickly reversed due to increasing fears that contagion from those failures could spill over to larger systemic banks. Investors have been gradually losing their confidence in the resiliency of the US banking sector, spurring bets that the Fed will be forced to halt its aggressive tightening to avoid a domino of collapses and a severe recession.

As expected, cryptocurrencies gained on those developments as lower interest rates are beneficial for risky assets. Meanwhile, the so-called decentralized nature of cryptocurrencies will be actually put to the test for the first time. Bitcoin was initially perceived as a protest against the traditional banking system and a method to expel intermediaries that capitalize on fees from each money transaction. Has the industry matured enough to substitute banks or will crypto enthusiasts’ optimism get shuttered?

Focus turns to the Fed

As we know the Fed has raised rates dramatically during the past year in an effort to get inflation under control. The next move would be to proceed with quantitative tightening, which is essentially to reduce the size of its balance sheet, to drain excess liquidity from markets. Nevertheless, the current instability in the banking sector has forced the Fed to inject funds back into the economy, partially unwinding its progress.

This scenario of falling interest rates and increasing liquidity closely resembles the macroeconomic environment where cryptocurrencies shined in 2020-2021. In Europe, the ECB pushed back against expectations of a more gradual tightening pace, with ECB President Christine Lagarde stating that there is no trade-off between price and financial stability. So, the Fed's meeting next week will be closely eyed from crypto investors as its actions and statements will have a substantial impact on cryptocurrency prices.

Bullish case for cryptos against stocks

The recent change in interest rate expectations is supposed to benefit all risky assets, including stocks and cryptocurrencies. But in case the US economy does not avoid a recession, digital assets are bound to outperform stocks. A severe recession will likely hurt corporate earnings and potentially lead to more collapses within sectors of the economy as we recently observed in the banking sector, making downside risks greater for equity indices.

At the same time, crypto traders seem unimpressed by failures within the industry, with Silvergate Capital and Signature Bank being the latest example of this trend. Finally, less aggressive tightening by the Fed translates into a softer dollar, which is inversely related to crypto prices but does not directly affect stocks.

Rally or bull trap?

From a technical perspective, BTCUSD posted a fresh 9-month high on Friday, extending its 2023 rally after bouncing at the 200-day simple moving average (SMA). Can Bitcoin continue to outperform or is it heading for a downside correction?

If buying pressures persist, the price could test the $27,960 hurdle before the spotlight turns to the May resistance zone of $32,380.

On the flipside, the recent support of $23,800 may act as the first line of defense, a violation of which could set the stage for the March low of $19,540.