Analysts say a number of factors are behind bitcoin’s New Year’s surge, including an increased likelihood of interest rate cuts and purchases by large buyers known as “whales.”
Philip Radvansky | Stick Pictures | Lightrocket | Getty Images
Bitcoin 2023 started on a positive note, with the price of the world’s largest digital token increasing by nearly 26% since the beginning of January.
On Saturday, the price of bitcoin exceeded $21,000 per coin for the first time since November 7.
This is still a long way from the record high bitcoin hit in November 2021 of $68,990. However, this gave market players reason for some optimism.
The monthly rally follows a terrible 2022 that saw major bankruptcies and scandals in the cryptocurrency industry, including the collapse of FTX, and a sharp decline in the broader market linked to central bank actions.
Analysts say a number of factors are behind bitcoin’s New Year’s rally, including an increased likelihood of interest rate cuts, as well as purchases by large buyers known as “whales.”
New year, new monetary policy?
Inflation is cooling and economic indicators show that US economic activity is slowing. This has made traders optimistic that the Federal Reserve will reverse or at least ease its rate hike strategy.
Last week, new US inflation data showed a modest decline, with the consumer price index falling 0.1% month-on-month in December, in line with Dow Jones estimates.
“Bitcoin retreated on macro data as investors shrugged off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC in an email.
“The most important macro data for investors to focus on is the weak services PMI and the downward trend in employment and wage data. This, along with the downward trend in inflation, has led to an improvement in confidence, while this comes at a time when valuations for Bitcoin … are at all-time lows The rally was driven by a softer monetary policy outlook amid weak macro data and lower valuations.
The Fed raised borrowing rates seven times in 2022, forcing riskier assets such as stocks and tech stocks in particular to retreat. In December, the benchmark funds rate rose to 4.25%-4.50%, the highest level since 2007.
Bitcoin has been embroiled in market drama around lending rates as it is increasingly viewed by investors as a riskier asset.
Proponents have previously talked about bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin fell short of that goal in 2022, instead falling more than 60% as the U.S. and other major economies grappled with higher rates and the cost of living.
Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a Jan. 13 note that this “raises hopes among market participants that the Fed will further slow the pace of interest rate hikes.”
The Fed is likely to keep interest rates high for now. However, some market players hope that central banks will start to moderate the pace of interest rate hikes or even cut rates. Some economists predict that the Fed’s rate cut could happen this year.
This is because the risk of recession is also playing on the minds of central bankers.
Two-thirds of chief economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to research released Monday by Davos organizers.
The U.S. dollar also fell, with the U.S. dollar depreciating by 9% against a basket of currencies used by U.S. trading partners over the past three months. Most bitcoin trades against the US dollar, making a weaker dollar better for bitcoin.
“We’re seeing the dollar peak, inflation coming down, interest rate hikes slowing — all of which point to markets taking on more risk over the next few months,” Vijay Ayyar, vice president of corporate development and international at Luno cryptocurrency, told CNBC.
‘whales’ buy BTC
According to Kaiko, larger buyers of digital coins, known as “whales,” could lead bitcoin’s recent rally.
In a series of tweets on Monday, the crypto data firm said trading volumes on the Binance cryptocurrency exchange rose from an average of $700 on Jan. 8 to $1,100 today, indicating renewed whale confidence in the market.
Whales are investors who accumulate large amounts of bitcoins. Some are individual, e.g MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are institutions such as market makers that act as intermediaries in trade between buyers and sellers.
Skeptics of digital currencies say this makes the market prone to manipulation by a select few investors with large stacks of tokens. According to fintech firm River Financial, the richest 97 bitcoin wallet addresses account for 14.15% of the total supply.
In December, University of Sussex professor Carol Alexander told CNBC that bitcoin could see a “managed bull market” in 2023, with bitcoin reaching north of $30,000 in the first quarter and $50,000 in the second half. With trading volume evaporating and fear levels extremely high in the market, whales will step in to support the market, he said.
Bitcoin mining difficulty is increasing
There are other factors at play.
Several bitcoin miners were laid off by falling prices. Bitcoin miners, who use power-hungry machines to verify transactions and mine new tokens, have been squeezed by falling prices and rising energy costs.
According to Ayyar, this is a good sign for bitcoin historically.
These actors accumulate huge piles of digital currency, making them one of the biggest sellers in the market. With miners offloading their holdings to pay off debt, this removes much of the remaining selling pressure on bitcoin.
Recently, however, bitcoin’s network “difficulty” has been increasing, meaning that more computing power is used to release new tokens into circulation.
According to BTC.com, mining difficulty hit a record high of 37.6 trillion on Sunday, which means it takes an average of 37.6 trillion hashes, or attempts, to find a valid bitcoin block and add it to the blockchain.
“Bitcoin mining difficulty is a measure of how difficult it is to generate the next block of transactions,” Markus Sotiriou, market analyst at digital asset broker GlobalBlock, told CNBC.
“Bitcoin mining difficulty dropped by 3.6% before the last update after a winter storm caused some miners to shut down. However, miners are now back online with new and more efficient machines.”
Meanwhile, further events in the cryptocurrency calendar may give traders some New Year’s cheer. It’s still a year away, but the so-called bitcoin “halving” is often a source of excitement for cryptocurrency investors.
The halving, in which bitcoin rewards to miners are halved, is seen by some investors as positive for the price of bitcoin as it squeezes supply.
“There are signs that this could be the beginning of a new era with Bitcoin because it usually happens about 15 to 18 months before a halving,” Ayyar told CNBC.
The next split is scheduled to take place between March and May 2024.
However, Ayyar warned: “We are currently in overbought territory with Bitcoin, so we could definitely see a downside.” He added that if bitcoin stays below $18,000 in the next few days, prices could fall.