Bitcoin had a tough 2022. Now investors are cautious about 2023 when it comes to cryptocurrencies.
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Bitcoin rallied higher over the weekend as traders cheered on news of another crypto-bust and placed bets on a Federal Reserve “pivot” to cut interest rates.
According to data from CoinGecko, the price of the #1 token briefly surpassed $23,000 for the first time since August 19, 2022. Since then it has eased slightly to $22,859.20. The jump takes bitcoin nearly 39% up since early January.
Ether, the second largest digital coin, surged as high as $1,664.78 on Saturday – the first time it has surpassed $1,600 since November 7, 2022. As of 6:40 a.m. ET, Ether was worth $1,639.30 each.
Bitcoin has started 2023 on a positive note, with investors hoping for a reversal of the monetary tightening that spooked market participants over the past year.
The Fed and other central banks began cutting interest rates in 2022, shocking holders of risky asset classes like stocks and digital tokens. Public technology stocks and private venture-backed start-ups were particularly hard hit as investors sought protection in perceived safer assets such as cash and bonds.
With US inflation now showing signs of cooling, some market participants are hoping central banks will start slowing the pace of rate hikes or even cutting rates. Economists previously told CNBC that they expect a Fed rate cut could come later this year.
“Fed tightening seems easier and inflation seems less risky,” said Charles Hayter, CEO of crypto data site CryptoCompare, in comments emailed to CNBC. “There is hope that there will be more caution around the world on rate hikes.”
The Fed is likely to keep interest rates high for the time being. However, some officials at the bank have recently called for a reduction in quarterly rate hikes amid fears of a slowdown in economic activity.
According to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, the world’s leading digital currency, bitcoin, “always looks like it’s bottomed out.”
According to Ayyar, Bitcoin short sellers have been pressured by sudden price movements. Short selling is an investment strategy in which traders borrow an asset and then sell it in hopes that it will lose value.
An extinction of these short positions, triggered by the surging bitcoin price, has “fueled the fire,” Ayyar said, as short sellers are forced to cover their bets by buying back the borrowed bitcoin to close them.
Which Crypto Crash?
Investors don’t appear to have been overly concerned by the collapses of leading crypto companies in the aftermath of digital currency exchange FTX’s bankruptcy in November.
Last week, the lending arm of New York-based crypto investment firm Genesis became the latest victim of the crypto crisis, seeking bankruptcy protection in a “mega” filing that lists total liabilities ranging from $1.2 billion to $11 billion.
“The Genesis debacle has been playing out for a while and is probably already priced in. FTX, on the other hand, has already had a significant impact on many investors, market psychology and the prices of several toxic assets,” Mati Greenspan, founder and CEO of crypto investment advisory firm Quantum Economics, told CNBC.
“However, it should be noted that the price of bitcoin itself is quite limited as FTX did not have any on their balance sheets.”
Despite its recent surge, Bitcoin is still about 67% off its all-time high.
The recent crypto plunge differs from previous cycles, due in large part to the role of leverage. Major crypto players engaged in risky lending practices and offered high yields that many investors today say are unsustainable.
This started in May with the collapse of terraUSD – or UST – an algorithmic stablecoin that was supposed to be pegged one-to-one to the US dollar. The failure of UST brought down terraUSD’s sister token Luna and hit companies exposed to both tokens.
Three Arrows Capital, a hedge fund with bullish views on crypto, plunged into liquidation over its exposure to terraUSD.
Then came the collapse of FTX, one of the world’s largest cryptocurrency exchanges, in November. It was headed by Sam Bankman-Fried, an executive who was often in the spotlight.
The fallout from FTX continues to impact the cryptocurrency industry. Since the crypto boom peaked in November 2021, around $2 trillion in value has been erased from the overall crypto market in a deep downturn known as “crypto winter.”
One analyst warned that technical indicators are suggesting that there could be some setback after the token’s recent rally.
Yuya Hasegawa, crypto market analyst at Japanese bitcoin exchange Bitbank, said that while bitcoin’s trend indicators are “generally signaling a strong uptrend,” its relative strength indicator, or RSI, “is separating from the price’s upside and is starting to slide lower.” . This is not a good sign for the current price development.”
“Bitcoin could test its August high and get support at the $20,000-$21,000 levels, but with its RSI diverging and some big tech gains this week, it could get quite unstable,” Hagesawa said in a statement from Monday.
However, the recent surge in bitcoin price has given some investors hope that the ice is starting to melt.
Greenspan said Bitcoin’s bullish momentum is typical of the cryptocurrency as investors anticipate the next so-called “halving” event — a change to the Bitcoin network that will cut miner rewards in half. This is seen by some investors as a positive for the token’s price as it depresses supply.
The next halving is scheduled to occur sometime between March and May 2024.
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