In the midst of a dark winter at the beginning of the year, bitcoin was in bad shape following 2022 marked by falling cryptocurrency values, company scandals, and bankruptcies.
In fewer than three months, bitcoin has regained its luster. It has outpaced other significant assets this year with gains of more than 70%, and on Wednesday, it was trading close to its highest level in nine months.
The original and biggest cryptocurrency has been here before, its 15-year history peppered with dramatic price increases and equally vertiginous drops. Fuelling the gains: interest rates.
According to six investors and analysts from the crypto and traditional financial industries who spoke to Reuters, markets anticipate that central bank increases in the cost of credit are reaching their peak, which is expected to support risky assets like bitcoin.
According to Noelle Acheson, an economist who has followed the cryptocurrency industry, “the macro narrative is the number one.” “Bitcoin is not only a risk asset; it is possibly the risk asset that is most sensitive to monetary liquidity.” Other variables are also at play, such as the banking industry’s unrest and persistent but unrealized hopes that bitcoin will become a widely accepted means of payment. In just 12 days, bitcoin has gained 45% and had its best week in four years.
Claims that bitcoin is an asset impervious to hazards in traditional finance have gained traction as the failure of American lenders Silicon Valley Bank and Signature Bank contributed to spur the takeover of 167-year-old Credit Suisse by competitor UBS on Sunday.
According to Usman Ahmad, CEO of Zodia Markets, the cryptocurrency exchange run by the venture arm of Standard Chartered and Hong Kong-based BC Technology Group, “It’s rather narrow-minded to say that bitcoin is going to flourish because a bank failed.”
But, since there is a lack of confidence in the banking system, it is almost essential. Bitcoin’s primary user base of retail investors has been fueling its growth, according to analysts. The interviews revealed that institutional investors, such as pension funds, are likely to continue to be skeptical of a long-lasting rebirth for the cryptocurrency. These investors have previously been wary of the unstable and mostly unregulated bitcoin.
Zhong Yang Chan, head of research at cryptocurrency data company CoinGecko, stated that “Bitcoin’s recent bull run looks to be predominantly supported by individual investors – ranging from retail to whales – since we have seen indications of institutions fleeing during this rise.”
According to digital asset management CoinShares, which attributes the movements to a hunt for liquidity during the instability in the banking sector, bitcoin investment instruments, which are preferred by larger investors, did indeed see outflows of $113 million last week.
Dramatic price fluctuations for bitcoin have previously been closely correlated with changes in monetary policy around the world. The COVID-19 pandemic inundated the world’s financial system with stimulus measures, and at-home investors fueled a six-fold increase in bitcoin prices between September 2020 and April 2021.
Supporters of cryptocurrency declared that the likelihood of a severe fall, which has traditionally occurred after bitcoin rallies, was reduced as a result of these actions and the growing interest in cryptocurrency from larger investors and businesses.
However, as rates started to increase in late 2021 and signs of rogue inflation pushed governments and central banks to cut back on stimulus programs, bitcoin fell more than 50% from its all-time high of $69,000 in just 75 days. The decline of a significant crypto token in 2022, brought on by increasing interest rates, caused the closure of significant hedge funds and crypto lenders, and a drop in bitcoin of nearly 65%. Regulatory issues and the abrupt collapse of the FTX exchange further battered it.
Irrespective of assertions of its supporters that bitcoin is a safe haven asset in times of political and economic stress, the dismal year served as another reminder of its susceptibility to outside shocks.
Undoubtedly, some investors claim that changes to bitcoin’s fundamental qualities can now sustain its price. A new type of non-fungible tokens on bitcoin have been made possible by software modifications, according to Richard Galvin of the cryptocurrency fund Digital Asset Capital Management. There are still uncertainties for investors in conventional assets.
Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, stated, “I don’t know if old-school currency people are reassessing it. “We are still having trouble defining a currency for bitcoin.”