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Analysts say there are many factors behind Bitcoin’s surge in the new year, including the increased likelihood of interest rate cuts and purchases by large buyers known as “whales.”
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Bitcoin 2023 is off to a strong start as the price of the world’s largest digital token has risen by almost 26% since the beginning of January.
On Saturday, the price of Bitcoin surpassed $21,000 per coin for the first time since November 7th.
It’s still a long way from Bitcoin’s record high of $68,990 set in November 2021, but it gives market players some optimism.
The month-to-date gains follow a tough 2022, which saw massive bankruptcies and scandals in the crypto industry, including the collapse of FTX, and sharp setbacks in broader markets linked to central bank actions. increase.
Analysts say there are many factors behind Bitcoin’s New Year’s rally, including an increased likelihood of interest rate cuts and purchases by large buyers known as ‘whales’. .
New Year, New Monetary Policy?
Inflation is declining and economic indicators point to a slowdown in US economic activity. This has left traders optimistic that the Federal Reserve could reverse, or at least ease, its rate hike strategy.
fresh last week US inflation data showed a modest retreat, with the December CPI falling 0.1% on a month-to-month basis, in line with Dow Jones estimates.
James Butterfill, head of research at digital asset management firm CoinShares, told CNBC in an email, “Bitcoin appears to have recombined with macro data as investors shrug off the collapse of FTX.
“The most important macro data that investors have been watching are the weak services PMI and the downtrend in employment and wages data, which, combined with the downtrend in inflation, has led to increased confidence… Close to all-time lows. The prospect of looser monetary policy against the backdrop of weak macro data and low valuations has led to the rise.
The Fed will raise borrowing rates seven times in 2022, sending risky assets such as stocks, especially technology stocks, plummeting. In December, the benchmark fund rate rose to his 4.25% to 4.50%, reaching its highest level since 2007.
Bitcoin has been embroiled in market drama over lending rates as it is increasingly seen as a risky asset by investors.
Proponents have previously talked about Bitcoin’s potential as a “hedge” to buy during periods of high inflation. However, Bitcoin fell short of its target in 2022, instead falling more than 60% as the United States and other major economies grappled with higher interest rates and cost of living.
Yuya Hasegawa, a crypto market analyst at Japanese crypto exchange Bitbank, said in a Jan. 13 memo that this “has given market participants hope that the Fed will further slow down the pace of rate hikes. ‘ said.
The Federal Reserve is likely to keep interest rates high for the foreseeable future. increase. Some economists predict the Fed could cut rates as early as this year.
That’s because recession risks are also hitting the minds of central banks.
About two-thirds of chief economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to a survey released Monday by Davos organizers.
The US dollar has also fallen, with the dollar depreciating 9% against the basket of currencies used by US trading partners over the past three months. A weaker dollar favors Bitcoin because the majority of Bitcoin transactions are against the US dollar.
Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, said: “The dollar has risen, inflation has eased and interest rate rises have slowed. It shows that we take more risks at , he told CNBC.
“Whale” buys BTC
According to Kaiko, large buyers of digital coins known as “whales” may be leading Bitcoin’s recent rise.
In a series of tweets on Monday, the crypto-data company said trading volumes on cryptocurrency exchange Binance had risen from an average of $700 on Jan. 8 to $1,100 today, signaling renewed confidence in the market by whales. is shown.
A whale is an investor who has accumulated a large amount of bitcoin. There are also individuals like MicroStrategy CEO Michael Thaler and Silicon Valley investor Tim Draper. Others are entities such as market makers that act as intermediaries in transactions between buyers and sellers.
Digital currency skeptics say this makes it easier for a select few investors with large token holdings to manipulate the market. The richest 97 bitcoin wallet address accounts for 14.15% of the total supply, according to fintech firm River Financial.
In December, Sussex University professor Carol Alexander told CNBC that Bitcoin could be in a “managed bull market” in 2023, surpassing $30,000 in the first quarter and rising to $50,000 in the second half. said to have sex. Her reasoning was that when trading volume evaporates and the level of fear in the market becomes very high, whales will step in to prop up the market.
Increased Bitcoin mining difficulty
There are other factors as well.
The drop in price has washed out several bitcoin miners. Bitcoin miners, who use power-hungry machines to validate transactions and create new tokens, are being weighed down by low prices and rising energy costs.
According to Ayyar, this historically bodes well for Bitcoin.
These actors have amassed large amounts of digital currency and have become some of the largest sellers in the market. As miners sell their holdings to pay off their debts, much of the remaining selling pressure on Bitcoin is removed.
Recently, however, the “difficulty” of the Bitcoin network has increased. This means more computing power is being deployed to circulate new tokens.
According to data from BTC.com, mining difficulty hit a record 37.6 trillion on Sunday. This means that it takes an average of 37.6 trillion hashes or attempts to find and add a valid Bitcoin block to the blockchain.
“Bitcoin mining difficulty is a measure of how difficult it is to create the next trading block,” Marcus Sotiriou, a market analyst at digital asset broker GlobalBlock, told CNBC.
“Bitcoin mining difficulty dropped 3.6% prior to the last update after a winter storm shut down some miners. But now miners are back online with new and more efficient machines. And it seems.”
2024 “half-life”
Meanwhile, events further down the cryptocurrency calendar could give traders some New Year’s cheer. Although still a year away, the so-called Bitcoin “halving” is an event that often leads to excitement among cryptocurrency investors.
The halving, when Bitcoin rewards to miners are halved, is seen by some investors as positive for the price of Bitcoin as it puts pressure on supply.
Ayyar told CNBC, “There are indications that this may be the beginning of a new cycle for Bitcoin, as it usually happens about 15 to 18 months before the halving.”
The next halving is scheduled between March and May 2024.
However, Ayyar warned that Bitcoin is in overbought territory at the moment and could definitely fall. He added that if bitcoin dips below $18,000 in the next few days, the price could fall.
