Crypto Quarterly is The Logic’s recurring series assessing the overall state of the crypto market, with a focus on Bitcoin, Ethereum, Flow and Cosmos’s Atom, four cryptocurrencies with strong ties to Canada.

It was one disaster after another for crypto in the first quarter of 2023—and yet, Bitcoin soared.

The first three months of the year were marked by headlines that should have been terrible for crypto markets.

Interest rates continued to rise. A string of bank failures, including the crypto-friendly Silvergate and Signature, brought the sector close to losing access to the U.S. financial system. And enforcement action escalated against the crypto industry south of the border.

Bitcoin shrugged it all off. The price of the original digital asset rose to US$28,041 on March 31, 33 per cent higher than the US$21,150 it was worth on Nov. 5, a few days before the collapse of Bahamas-based platform FTX caused prices to crash that month.

While Ether’s performance didn’t match Bitcoin’s, it has also made a comeback from the FTX collapse and then some, increasing nine per cent since Nov. 5 to US$1,793 on March 31. Smaller cryptocurrencies did not achieve the same success—Cosmos’s Atom, for example, fell 26 per cent to US$11.14 over that time period, while Dapper Labs’s Flow fell 47 per cent to US$0.98.

Some interpreted Bitcoin’s rally as a vindication of its original purpose. “Bitcoin is many things, but it crucially offers a genuine alternative to the traditional banking system, and [founder Satoshi Nakamoto] intended it that way,” wrote Galaxy Research’s Alex Thorn in a note in March.

Skeptics pointed to other factors. “The narrative that Bitcoin prices are pumping because people are nervous about bank stability and therefore are putting their cash into Bitcoin because they believe it to be a safe store of value is being repeated despite a lack of evidence,” wrote Molly White, of “Web3 Is Going Just Great” fame, in a newsletter.

As alternative explanations, White cited expectations of slowing interest-rate hikes, the liquidation of short positions, nervousness around stablecoins, endorsements by influential people and low liquidity. In an interview with The Logic, Riyad Carey, a research analyst at the digital-assets market-data firm Kaiko, said low liquidity is indeed causing both sharp price climbs and plunges in crypto markets.

Kaiko coined the term “the Alameda Gap”—referring to the FTX-linked trading firm that collapsed in November—to describe the plunge in crypto market liquidity as trading shops shuttered or pulled their bids and asks amid the volatility. Many major trading firms had already been washed out from the failure of the stablecoin TerraUSD and related contagion in the summer of 2022.

“We haven’t seen anybody fill that gap from Alameda yet,” Carey said. “When there’s less liquidity in the market, [crypto assets] are really susceptible to price movements, both up and down.”

Bitcoin also benefited from traders pulling their money out of stablecoins. The crypto tokens, whose value is tied to a real-world asset, usually the U.S. dollar, appeared less than stable in the first three months of the year, ending the quarter with a notably different market share composition.

Most notably, Circle’s USDC temporarily lost its peg to the U.S. dollar in March, after holders learned that Circle had kept some of its backers’ funds at Silicon Valley Bank, which had just collapsed at the time, and rushed to redeem their tokens, causing ripple effects throughout decentralized-finance markets. February’s regulatory crackdown on Paxos, which issues the Binance-linked BUSD stablecoin, led to over US$2 billion in outflows from the stablecoin, with an additional US$500 million flowing out in the 24 hours following the filing of a U.S. lawsuit against Binance and its Chinese Canadian CEO Changpeng Zhao.

The main beneficiary of the turmoil was Tether, which ended the quarter commanding about 64 per cent of the US$132-billion stablecoin market, up from 50 per cent on Jan. 1. As the crypto-analytics firm Glassnode noted, “It is somewhat ironic that Tether would be seen as a safe haven amidst fears of a wider contagion,” given the questions that have historically swirled around the quality of its reserves.

Canadian crypto stocks had a mixed quarter, though most firms endured more market turmoil. Mining firms got a boost from the rising price of Bitcoin, but the share prices of other companies in the digital-asset investing and trading industry finished the quarter down.

The stock price of Toronto Stock Exchange-listed Galaxy Digital has lost 12 per cent of its value from Nov. 4, before FTX collapsed, to March 31. Last week, the company announced a fourth-quarter loss of US$288 million, compared to net income of $521 million during the same period the previous year.

The stock prices of Ether Capital, which produces software and invests in Ethereum’s native token, and WonderFi, which owns the cryptocurrency-trading platforms Bitbuy and Coinberry, haven’t recovered since the collapse of FTX, either. Ether Capital’s stock lost 11 per cent of its value from Nov. 4 to March 31, while WonderFi fell 40 per cent. (Between March 31 and April 3, however, WonderFi’s stock jumped 25 per cent from $0.16 to $0.20 after the company announced a business combination with rivals CoinSmart and Coinsquare.)

Sebastien Davies, market strategist at Vancouver-based AQN Digital, a digital-asset investment-fund manager, said a decline in trading activity since the failure of FTX is likely one factor. Another might be investors deciding it would be easier to buy crypto assets directly, rather than the stock of a company that invests in them, he said. “Do you need to get the stock? Maybe not.”

Ultimately, Davies said he thinks the turmoil will end up being good for the sector.

“As you stress bones, they become stronger. And if you don’t stress bones, they become weaker,” he said. “Because the system has kind of gone through and survived those stresses, it seems like it’s a bit more robust.”