Why is bitcoin (BTC) rallying in January?

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A number of factors are behind bitcoin’s New Year’s rise, according to analysts, including an increased likelihood of interest rate cuts and purchases by large buyers known as “whales.”

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Bitcoin has started 2023 on a positive note, with the price of the world’s largest digital token up about 26% since the beginning of January.

On Saturday, the price of bitcoin rose above $21,000 per coin for the first time since November 7.

It is still far from the peak of $ 68,990 bitcoin marked in November 2021. But it has given some hope to market players.

The month-to-date rally follows a bleak 2022, which saw major bankruptcies and scandals in the crypto industry, including the collapse of FTX, and a sharp pullback in the broader associated market. to central bank functions.

Analysts say a number of factors are behind bitcoin’s New Year’s rise, including an increased likelihood of interest rate cuts, as well as purchases by large buyers known as “whales.” “

New year, new monetary policy?

Inflation is cooling down, and economic indicators suggest that US economic activity is slowing down. That has made traders optimistic that the Federal Reserve could reverse, or at least reduce, its rate hike strategy.

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Last week, new US inflation data showed a slight retreat, with the consumer price index declining 0.1% in December on a monthly basis, according to Dow Jones estimates.

“Bitcoin appears to have joined the macro data as investors reject FTX’s fall,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC via email.

“The most important macro data investors focus on is the weak services PMI and the downward trend in employment and wage data. This together with a downward trend in inflation has led to an improvement in confidence, while it comes at a time when the valuation for Bitcoin .. is near all the lows. Expectations for easier monetary policy on the back of weaker macro data and low valuations have driven this rally.”

The Fed raised lending rates seven times in 2022, forcing risky assets such as stocks – and tech stocks, in particular – into a tailspin. In December, the benchmark funding rate rose to 4.25%-4.50%, reaching the highest level since 2007.

Bitcoin has been caught up in the market drama surrounding lending rates, as investors increasingly see it as a risky asset.

Supporters previously talked about the potential of bitcoin as a “hedge” for purchases in times of high inflation. But bitcoin failed to meet that goal in 2022, instead sliding more than 60% as the US and other major economies grappled with higher rates and the cost of living.

Yuya Hasegawa, a crypto market analyst at Japanese crypto exchange Bitbank, said in a January 13 note that this was “brewing hope among market participants that the Fed will further slow the pace of rate hikes.” “

The Fed is likely to keep interest rates high for the time being. However, some market players are hopeful that central banks will begin to slow the pace of rate hikes, or even cut rates. Some economists predict that a Fed rate cut could happen as soon as this year.

That’s how the risk of recession is also playing on the minds of central bankers.

About two-thirds of leading economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to a survey released by the Davos organizer on Monday.

The US dollar has also weakened, with the greenback down 9% against a basket of currencies used by US trading partners in the past three months. Most bitcoin trades against USD, making a weaker dollar better for bitcoin.

“We’re seeing the dollar tick higher, inflation slowing, interest rate hikes slowing – all pointing to markets taking on more risk over the coming months ,” Vijay Ayyar, vice president of corporate and international development at crypto exchange Luno. , reported CNBC.

‘Whales’ buy BTC

More buyers of digital coins called “whales” may lead the latest rally in bitcoin, according to Kaiko.

The crypto data firm said in a series of tweets on Monday that trading volumes had increased from an average of $700 on January 8 to $1,100 today on the crypto exchange Binance, reflecting renewed confidence in the bullish market. .

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Whales are investors who have accumulated large deposits of bitcoin. Some are individuals, like MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are organizations such as marketers, who act as intermediaries in trades between buyers and sellers.

Digital currency skeptics say this leaves the market prone to being manipulated by a select few investors with huge piles of tokens. The richest 97 bitcoin wallet addresses account for 14.15% of the total supply, according to fintech company River Financial.

In December, Carol Alexander, a professor at the University of Sussex, told CNBC that bitcoin could see a “directed bull market” in 2023 in which bitcoin travels north of $30,000 in the first quarter, and to $50,000 in the second half. Her reasoning was that with trading volumes evaporating, and the level of fear in the market very high, whales would then move in to prop up the market .

Bitcoin Mining Problem Rising

There are other features, too.

Several bitcoin miners have exited with the drop in prices. Bitcoin miners, who use power-intensive machines to verify transactions and mint new tokens, are being squeezed by the drop in prices and rising energy costs.

That’s historically a good sign for bitcoin, according to Ayyar.

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These actors amass huge piles of cryptocurrency, making them some of the biggest sellers on the market. With miners offloading their holdings to pay off debt, that takes away much of the remaining selling pressure on bitcoin.

Recently, however, the “difficulty” of the bitcoin network has been increasing, meaning that more computing power is being used to distribute new tokens into circulation.

Mining difficulty reached a record 37.6 trillion on Sunday, according to BTC.com data, meaning 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 is to create the next block of transactions,” Marcus Sotiriou, a market analyst at digital asset broker GlobalBlock, told CNBC.

“Bitcoin mining difficulty dropped 3.6% before the last update, after a winter storm forced some miners to shut down. However, now miners seem to be back online, with new and more efficient tools.”

2024 ‘half’

At the same time, events further down the crypto calendar could give traders a reason for some New Year’s cheer. It is still a year away, but the so-called bitcoin “halving” is an event that often leads to happiness for crypto investors.

The halving, where bitcoin profits for miners are cut in half, is seen by some investors as a good thing for the price of bitcoin because it squeezes supply.

“There are signs that this could be the beginning of a new cycle with Bitcoin, because it usually takes about 15-18 months before the second half,” Ayyar told CNBC.

The next half is expected to take place sometime between March and May 2024.

However, Ayyar warned, “At this point, we are in an over-money zone with Bitcoin so we could definitely see a fall. ” Prices could go lower if bitcoin closes below $18,000 in the next few days, he said.

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