What happened
In this market, where investors are looking for any sign that hawkish monetary policy moves could be on their way out, investors appear to have seen enough Wednesday to spark a rally in some higher-risk assets. While the major stock indexes' results in morning trading were mixed, cryptocurrency prices surged, with many top tokens touching multiweek highs.
Among the large-cap cryptos, Cardano (ADA 0.39%), Solana (SOL 5.97%), and Polkadot (DOT 3.15%) were some of the biggest gainers. As of 11:15 a.m. ET, they were up 8.7%, 7.9%, and 6.3%, respectively, over the prior 24 hours.
These moves were led by the largest short liquidations that crypto investors have seen since July 2021. A short liquidation is the unwinding of a leveraged short position. Thus, calls for a continued short squeeze in the crypto sector have increased. As more leveraged short positions are liquidated, new investors may be enticed to take a bullish stance on these higher-risk digital assets.
The key catalyst spurring Wednesday's bullish sentiment around crypto appears to have been the decision by the Bank of Canada to raise its benchmark interest rate at a slower-than-expected pace. The Canadian central bank boosted its benchmark overnight lending rate by 50 basis points (0.5 percentage points). Most experts had expected a 75-basis-point move. This slower pace of rate hikes north of the border has stoked expectations that other central banks could follow suit, leading to an eventual pause in rate hikes and a potential pivot down the road.
So what
It's undeniable that macro forces pushed the valuations of all speculative higher-risk assets to incredibly high levels in 2021. That said, the impressive monetary policy tightening provided by most global central banks this year poured cold water on the rise of cheap leverage and speculation in the markets. Crypto was among the biggest beneficiaries of the years-long period of near-zero interest rate policies, for sure. Accordingly, any path that could lead back toward low rates is being seen as a positive by crypto investors.
Cardano, Solana, and Polkadot all sport their own unique sets of catalysts and headwinds. However, in this market, macro forces appear to greatly outweigh any sort of token-specific news in terms of moving token prices. As such, it appears likely we'll see most cryptos continuing to trade in line with each other as macro conditions evolve.
Now what
It's unclear whether Wednesday's move by the Bank of Canada foreshadows similar policy adjustments by the Federal Reserve or other central banks. The thesis among many investors appears to be that the Fed and its global peers only need a small push to convince them to lift their feet off the brakes of the economy. The Bank of Canada's move, combined with the relatively weak housing market data that was released this month, could provide the Fed with enough of a reason to slow the pace of its interest rate hikes.
This is certainly a positive near-term catalyst for crypto. And given the amount of leverage in the crypto space, it's plausible a sustained short squeeze could take hold over the next few days. The question for investors taking a multiyear view of the sector is what that near-term price action will portend over the medium term. For now, that medium-term picture remains murky.
