I started Bitcoin 2023 on a positive note, as the price of the world’s largest cryptocurrency soared By about 26% since the beginning of January.
On Saturday, Bitcoin rose above $21,000 for the first time since November 7.
Although the current highs are still far from the record set by the cryptocurrency in November 2021 of $68,900, it has given market players reason for some optimism.
The rally so far comes on the heels of a negative 2022 for the industry, which 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 said a number of factors behind bitcoin’s rally in the new year, including the increased likelihood of interest rate cuts, as well as buying by large buyers known as “whales.”
New monetary policy?
With the rate of inflation declining, and indications from economic indicators of a slowdown in US economic activity, traders are optimistic that the Federal Reserve can reverse its policy, or at least ease it, with regard to interest rates.
Last week, new US inflation data showed a modest decline, with the consumer price index falling 0.1% in December on a monthly basis, in line with Dow Jones estimates.
James Butterville, head of research at digital asset management company CoinShares, said: “Bitcoin appears to have regained its relationship with macroeconomic data, with investors ignoring the collapse of FTX,” according to what he said to CNBC, and was seen by Al Arabiya.net.
He added, “The most important macro data that investors focus on is the weakness of the PMI for services and the decline in employment and wages data.”
“These indicators on the downside of inflation have improved confidence, while it comes at a time when Bitcoin valuations are near all-time lows,” Butterville continued.
“The prospect of looser monetary policy on the back of weaker macro data and lower valuations is what drove the rally,” he said.
And the Fed raised borrowing rates 7 times in 2022, which led to the deterioration of risky assets such as stocks, especially technology stocks. In December, the bank’s benchmark interest rate rose to 4.25% -4.50%, its highest level since 2007.
Bitcoin has caught up with the market over lending rates, as investors increasingly view it as a risky asset.
This comes as cryptocurrency backers have previously pointed to Bitcoin’s potential as a “hedge” for buying in times of high inflation.
High rates of inflation
But bitcoin fell short of that target in 2022, instead plummeting more than 60%, as the United States and other major economies grappled with rising rates and costs of living.
The Fed is likely to keep interest rates high for the time being.
However, some market players hope that central banks will start to ease up on rate hikes, or even cut rates.
Some economists expect the Fed to cut interest rates as soon as this year.
Supporting their point of view is the risk of recession, which is an obsession in the minds of central bankers.
About two-thirds of the leading economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to research published by the Davos conference organizer on Monday.
The US dollar also weakened, with the dollar down 9% against a basket of currencies used by US trading partners in the past three months.
The majority of bitcoins are traded against the US dollar, which makes a weaker dollar better for bitcoin.
In turn, Vice President of Corporate Development and International Cryptocurrency Exchange Luna, Vijay Aiyar, said: “We are seeing a rising dollar at the top, easing inflation, and slowing interest rate hikes – all of which point to an increase in risk in the markets over the next few months.”
The return of the whales
Larger buyers of the cryptocurrency known as “whales” may be driving the latest bitcoin rally, according to crypto data firm Caico.
In a series of tweets on Monday, the crypto data company said trading volumes jumped from an average of $700 on January 8 to $1,100 today on cryptocurrency exchange Binance, indicating renewed confidence in the market by whales.
Referred to as “crypto whales,” investors have stockpiled large piles of bitcoin, some of them individuals, such as MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper, while others are entities such as market makers, who act as intermediaries in deals between buyers. and sellers.
Cryptocurrency skeptics said this makes the market vulnerable to manipulation by a select few investors with large stacks of tokens.
The wealthiest names with 97 bitcoins or more account for about 14.15% of the total supply, according to financial technology firm River Financial.
In December, University of Sussex professor Carol Alexander said Bitcoin could see a “managed bull market” in 2023 with Bitcoin heading north to $30,000 in the first quarter, and $50,000 in the second half.
And she explained her vision, that with the evaporation of trading volumes, and the high level of fear in the market dramatically, the whales will intervene to support the market.
Difficulty mining bitcoin
At a time when Bitcoin mining operations have declined, and many miners have exited the market due to low prices and high energy costs, Aiyar said, this is a historically good sign for Bitcoin.
“These miners accumulate huge piles of cryptocurrency, which makes them some of the biggest sellers in the market, and as miners unload their holdings to pay off debt, it removes a lot of the remaining selling pressure on Bitcoin,” he added.
Recently, however, the “difficulty” of the Bitcoin network has been increasing, which means more computing power is being deployed to unlock new tokens in circulation.
Mining difficulty reached a record high of 37.6 trillion on Sunday, according to BTC.com data, which means that on average, it would take 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 will be to generate the next set of transactions,” Marcos Soterio, a market analyst at digital asset broker GlobalBlock, said in a note on Monday.
Bitcoin mining difficulty had fallen by 3.6% prior to the latest update, after a storm of downsides led to the closure of some cryptocurrency mining companies.
But now miners seem to be back online with new and more efficient machines.
remediation period
Meanwhile, events further down the cryptocurrency calendar may give traders cause for some New Year’s cheer, as we are still a year away from the so-called halving for Bitcoin, an event that often causes cryptocurrency investors to get excited.
“Halving,” where Bitcoin rewards for miners are halved, is seen by some investors as positive for the Bitcoin price because it puts pressure on supply.
“There are signs that this could be the beginning of a new cycle with Bitcoin bullish, as it usually happens around 15-18 months before halving,” Aiyar said.
The next redress is scheduled to occur sometime between March and May of 2024.
However, Aiyar cautioned, “At this point, we are overbought for Bitcoin so we could definitely see a dip.”
He added that prices could drop if bitcoin closes below $18,000 in the next few days.