New Year, New Rally: Why Bitcoin Is Up 26% This Month After A Turbulent 2022

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New Year, New Rally: Why Bitcoin Is Up 26% This Month After A Turbulent 2022


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.”

Philip Radwanski | Sopa Images | Lightrocket | Getty Images

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 rally from the beginning of the month, tough 2022,saw bankruptcy and scandal in the crypto industry including Collapse of FTXand a sharper setback in the broader market associated with central bank actions.

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.

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fresh last week US inflation data The consumer price index fell 0.1% on a month-to-month basis in December, marking a modest contraction. 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 cryptocurrency market analyst at Japanese cryptocurrency exchange Bitbank, said in a Jan. 13 memo that this “provides market participants hope that the Fed will further slow down the pace of rate hikes.” brought about,” he said.

The Federal Reserve is likely to keep interest rates high for the foreseeable future. increase. Some economists Federal Reserve rate cut It could happen 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: , 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.

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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, Professor Carol Alexander of the University of Sussex said, told CNBC That bitcoin could see a “managed bull market” in 2023, with Bitcoin likely to top $30,000 in the first quarter and reach $50,000 in the second half. was that once trading volume evaporated and the level of fear in the market became too high, whales would 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.

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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, on average, 37.6 trillion hashes or attempts are required 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 that “usually around 15 to 18 months before the halving, there are signs that a new Bitcoin cycle is starting.”

The next halving is scheduled between March and May 2024.

However, Ayyar warned, “At the moment, Bitcoin is in overbought territory and could definitely fall.” He added that if Bitcoin breaks below $18,000 in the next few days, the price could fall.

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