U.S. banking crisis worsens, but the Fed raises rates: how will Bitcoin's role change?

On the eve of important economic events, Bitcoin was in a stable position near the $27k support level. At the same time, trading volumes and bearish activity were limited, as investors awaited clarification on the key interest rate situation.

As a result of yesterday's trading day, a large number of facts were announced, indicating the approach of an even more challenging economic period. Despite this, there are good reasons to believe that BTC and crypto assets will emerge victorious from the new stage of the crisis.

The situation in the stock market can confidently be called tense, as the price movement of the S&P 500 index fully repeats the patterns of assets on the eve of the Great Depression. At the same time, Bank of America states that most companies are reporting results above expectations.

It is also reported that investment inflows into U.S. money funds have resumed. The country's authorities have confirmed that measures are being prepared to resolve the crisis in the banking sector. All these statements can be confidently called positive, but at the same time, the situation continues to worsen.

BBG reports that hedge fund shorts in S&P 500 index futures have reached a 12-year high. Morgan Stanley also notes that the stock market may lose a significant portion of its capitalization amid the looming recession.

At the same time, the number of open job vacancies in the U.S. labor market continues to decline, which is a negative factor indicating the growing unemployment rate. The ECB notes a record decline in business credit demand since 2008 in the first quarter of 2023.

Despite all the aforementioned facts, the Federal Reserve decided to raise the interest rate by 0.25% to 5.25%. Powell noted that inflation is still significantly above the 2% target, and the labor market and banking system allow the agency to continue raising the rate.

The official noted that the Federal Reserve's further decisions will depend on the actual inflation data received. Powell stated that if necessary, the regulator is ready to do more to achieve the goal of reducing inflation to 2%.

Bitcoin emerged victorious from this situation and recovered above $29k. Firstly, this happened due to the decline in the asset price on Monday. The Federal Reserve did exactly what was expected of it, leading to the cryptocurrency's price recovery.

In addition, tension is growing around the stock market, and more investors are turning to assets capable of protecting capital from potential collapse. As of May 4, the total volume of bankrupt banks amounts to about $535 billion, which is already more than during the 2008 crisis.

Despite Powell's statements, the banking system crisis is only escalating, as evidenced by the 54% drop in PacWest Bankcorp's stock price. This creates a large window of opportunity for BTC as a hedging tool and an alternative to the traditional financial system.

In the short term, BTC/USD will continue to remain within the $27k–$29.9k range. The main target for the asset is a bullish breakout of the $30k level, where large liquidity volumes are gathered. However, as of May 4, we are observing a local period of consolidation and a reorientation of investors towards BTC, so powerful price movements from the cryptocurrency should not be expected.

The situation in the U.S. banking sector and credit problems in the EU are bringing the global economy closer to recession. The slowdown in economic development occurs amid growing mistrust of the traditional financial system, and this is the perfect moment for Bitcoin to show its potential and for gold to remind of itself.