Several factors are behind bitcoin’s New Year’s surge, according to analysts, including the possibility of a lower interest rate hike and buying activity by large buyers known as “whales.”
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Bitcoin has started 2023 on a positive note, with the price of the world’s largest digital token up around 26% since the beginning of January.
On Saturday, the bitcoin price rose above $21,000 per coin for the first time since Nov.
It is still a long way from bitcoin’s record high of $68,990 recorded in November 2021. But it has given market players some reason to be optimistic.
Monthly rally after a grim 2022had seen default and big scandal in the cryptocurrency industry, including the collapse of FTXand a sharp drop in the broader market linked to central bank actions.
Analysts say several factors are behind bitcoin’s New Year’s rise, including the possibility of a lower interest rate hike, as well as buying by big buyers known as “whales”.
New year, new monetary policy?
Inflation is cooling down and economic indicators show that US economic activity is slowing. That left traders optimistic that the Federal Reserve could reverse, or at least soften, their rate-raising strategy.
Last week, fresh US inflation data showed a modest retreat, with the consumer price index falling 0.1% in December on a monthly basis, in line with Dow Jones estimates.
James Butterfill, head of research at digital asset management firm CoinShares, told CNBC via email: “Bitcoin seems to have merged with the macro data as investors ignored the fall. dump of FTX”.
“The most important macro data investors are focusing on are the weak services PMI and the downtrending wage and employment data. This coupled with a downward trend in inflation has led to an improvement in confidence, while it is at a time when Bitcoin valuations.. are near all-time lows. The prospect of monetary policy easing on the back of weaker macro data and undervalued valuations is to blame for this rally.”
The Fed has raised borrowing rates seven times by 2022, forcing risky assets like stocks — and tech stocks in particular — into a tailspin. In December, the benchmark fund rate rose to 4.25% -4.50%, reaching its highest level since 2007.
Bitcoin has been caught up in the market drama surrounding lending rates, as it is increasingly seen by investors as a risky 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 target by 2022, instead dropping more than 60% as the United States and other major economies grapple with higher rates and cost of living.
Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a January 13 note that this is “generating hope among market participants that the Fed will continue to slow down the rate of interest rate increase.”
The Fed is likely to keep interest rates high for the time being. However, some market participants hope that central banks will begin to ease the pace of rate hikes, or even cut rates. Some economists predict a Fed cuts interest rates could happen this year.
That’s because the risk of a recession is also on the minds of central banks.
About two-thirds of chief economists surveyed by the World Economic Forum believe a global recession is possible by 2023, according to research released by organizer Davos on Monday.
The US dollar also fell, with the greenback down 9% against a basket of currencies used by US trading partners over the past three months. The majority of bitcoin trades against the USD, making a weaker dollar better for bitcoin.
“We are seeing the dollar strengthen, inflation eases, interest rate hikes slow,” said Vijay Ayyar, vice president of international and corporate development at crypto exchange Luno. – all suggest that the market will be more at risk over the next few months.” , told CNBC.
‘Whale’ buys BTC
According to Kaiko, larger buyers of digital currencies known as “whales” may be leading the latest bitcoin bull run.
The crypto data firm said in a series of tweets on Monday that trade size has increased from an average of $700 on January 8 to $1,100 today on the crypto exchange. from Binance, showing renewed faith in the whale market.
Whales are investors who have hoarded large amounts of bitcoin. Some are personal, like micro strategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers who act as intermediaries in transactions between buyers and sellers.
Skeptics of digital currencies argue that this leaves the market vulnerable to manipulation by a select few investors with large numbers of tokens. According to fintech firm River Financial, the 97 richest bitcoin wallet addresses account for 14.15% of the total supply.
In December, Carol Alexander, a professor at the University of Sussex, told CNBC that bitcoin could see a “managed bull market” in 2023, in which bitcoin climbs above $30,000 in the first quarter and to $50,000 in the second half. Her reasoning is that with volume evaporating and fear levels extremely high in the market, whales will step in to support the market.
Bitcoin mining difficulty is increasing
There are other factors at play, too.
Some bitcoin miners have been phased out due to the price drop. Bitcoin miners, who use energy-intensive machines to verify transactions and mint new tokens, have been hit by the price drop and soaring energy costs.
According to Ayyar, that is a good sign for bitcoin.
These actors accumulate large amounts of digital currency, making them one of the biggest sellers in the market. With miners reducing their holdings to repay debt, that eliminates much of the remaining selling pressure on bitcoin.
Recently, however, the “difficulty” of the bitcoin network has been increasing, meaning that more computing power is being deployed to release new tokens into circulation.
Mining difficulty hit a record 37.6 trillion on Sunday, according to BTC.com data, meaning that, on average, it would take 37.6 trillion hashes or attempts to find a valid bitcoin block and add it to the blockchain.
Marcus Sotiriou, market analyst at digital asset brokerage GlobalBlock, told CNBC: “Bitcoin mining difficulty is a measure of how difficult it is to generate the next block of transactions.
“Bitcoin mining difficulty dropped 3.6% before the last update, after a winter storm caused some miners to close. However, for now the miners appear to be up and running. back in motion with new and more efficient machines.”
‘halving’ in 2024
Meanwhile, the next events in the crypto calendar could bring traders joy for the New Year. It’s still a year away, but the so-called “halving” of bitcoin is an event that often leads to excitement for crypto investors.
The halving, in which the bitcoin rewards for miners are cut in half, is seen by some investors as positive for the bitcoin price because it reduces the supply.
“There are signs this could be the start of a new cycle for Bitcoin, as it usually takes place between 15-18 months before the halving,” Ayyar told CNBC.
The next halving is expected to take place sometime between March and May 2024.
However, Ayyar warned: “At the moment, we are in overbought territory with Bitcoin and therefore could certainly see a drop.” He added that the price could drop if bitcoin closes below $18,000 in the next few days.
