There are a number of factors behind bitcoin’s New Year’s rally, according to analysts, including the increased likelihood of interest rate cuts and purchases by large buyers known as “whales.”
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bitcoin The year 2023 has started on a positive note, as the price of the largest digital token in the world has increased by almost 26% since the beginning of January.
On Saturday, bitcoin rose above $21,000 per coin for the first time since November 7.
It is still a far cry from Bitcoin’s record high of $68,990 set in November 2021. But it has given market players reason for some optimism.
Follows the height of the month to date a grim 2022who saw Bankruptcy and major scandals In the crypto industry, incl FTX breakdownand a sharp decline in the broader market linked to the central bank’s actions.
Analysts say a number of factors are 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.”
The inflation rate is falling, and economic indicators point to a slowdown in US economic activity. This made traders optimistic that the Federal Reserve could reverse, or at least mitigate, its rate hike strategy.
“Bitcoin appears to have recovered macro data as investors ignore the FTX crash,” James Butterville, head of research at digital asset management firm CoinShares, told CNBC via email.
“The main macro data that investors are focusing on is the weaker services PMI and falling employment and wages data. This, along with the downward trend in inflation, has improved confidence, while it comes at a time when bitcoin valuations…are near an all-time low.” The prospect of looser monetary policy on the back of weaker macroeconomic data and lower valuations is what drove the rally.”
The Fed raised borrowing rates seven times in 2022, which has depressed risky assets like stocks – and technology stocks in particular -. In December, the benchmark money rate rose to 4.25%-4.50%, marking its highest level since 2007.
Bitcoin has been caught in a market stalemate over lending rates, as investors increasingly view it as a risky asset.
Backers have previously spoken of bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin failed to meet that target in 2022, instead plunging more than 60% as the United States and other major economies grappled to raise rates and costs of living.
Yuya Hasegawa, a cryptocurrency market analyst at Japanese cryptocurrency exchange Bitbank, said in a note on Jan. 13 that this was “hope brewing among market participants that the Fed will slow further with the pace of rate hikes.”
The Fed is likely to keep interest rates high for the time being. However, some market players hope that central banks will begin to ease the pace of interest rate hikes, or even cut rates. Some economists expect A Cut the Federal Reserve rate It could happen as soon as this year.
This is because the risk of recession is also playing in the minds of central bankers.
About two-thirds of the top economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to research published by the Davos regulator 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.
“We’re seeing a dollar rally at the top, inflation easing, interest rate hikes slowing — all point to an increase in risk in the markets over the next few months,” Vijay Aiyar, vice president of corporate development and international at cryptocurrency exchange Luno, told CNBC.
Whales buy bitcoin
Larger buyers of the cryptocurrency known as “whales” may be driving bitcoin’s latest rally, according to Caico.
The crypto data firm said in a series of tweets on Monday that 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.
Whales are investors who have stockpiled large piles of bitcoin. Some of the individuals, such as MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers, who act as intermediaries in deals between buyers and sellers.
Digital currency skeptics say this makes the market vulnerable to manipulation by a select few investors with large stacks of tokens. The top 97 bitcoin addresses account for 14.15% of the total supply, according to fintech firm River Financial.
In December, Carol Alexander, a professor at the University of Sussex, said: he told CNBC Bitcoin could see a “managed bull market” in 2023 as bitcoin travels north by $30,000 in the first quarter, and to $50,000 in the second half. Her reasoning was that as trading volumes evaporate, and the level of fear in the market is so high, the whales will step in to support the market.
Other factors also play a role.
Many bitcoin miners have been dumped due to the price drop. Bitcoin miners, who use energy-intensive machines to verify transactions and mint new tokens, have been squeezed by stagnant prices and rising energy costs.
According to Ayyar, this date is a good sign for bitcoin.
These actors accumulate huge piles of digital currencies, which makes them some of the biggest sellers in the market. With miners offloading their holdings to pay off debt, that removes much of the remaining selling pressure on Bitcoin.
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 block of transactions,” Marcos Soterio, a market analyst at digital asset broker GlobalBlock, told CNBC.
“Bitcoin mining difficulty dropped by 3.6% prior to the latest update, after a winter storm shut down some miners. However, miners now appear to be back online with new, more efficient machines.”
Meanwhile, events that fall further down the cryptocurrency calendar can give traders some New Year’s cheer. We’re still a year away, but the so-called Bitcoin “halving” is an event that often causes crypto investors to get excited.
The halving, where bitcoin rewards for miners are halved, is seen by some investors as positive for the bitcoin price as it puts pressure on supply.
“There are signs that this could be the beginning of a new cycle with Bitcoin, as it usually happens around 15-18 months before the halving,” Aiyar told CNBC.
The next halving is scheduled to occur sometime between March and May of 2024.
However, Ayyar warned, “At this point, we are overbought with Bitcoin and therefore we could definitely see a dip.” He added that prices could drop if bitcoin closes below $18,000 in the next few days.
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