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New year, new rally: Why bitcoin is up 26% this month after a tumultuous 2022

Analysts say a number of factors are driving bitcoin’s New Year rally, including an increased likelihood of lower interest rates and buying by large buyers known as “whales.”

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Bitcoin started 2023 on a high note, with the price of the world’s largest digital token up around 26% since early January.

On Saturday, the price of bitcoin topped $21,000 per coin for the first time since Nov. 7.

That’s still a far cry from bitcoin’s all-time high of $68,990 hit in November 2021. But it has given market participants reason for optimism.

The rally since the beginning of the month follows a sinister 2022who saw major insolvencies and scandals in the crypto industry, including the FTX collapseand a sharp decline in the broader market linked to central bank actions.

Analysts say a number of factors are driving bitcoin’s New Year rally, including an increased likelihood of lower interest rates, as well as buying by large buyers known as ” whales”.

New year, new monetary policy?

Inflation is slowing and economic indicators suggest a slowdown in economic activity in the United States. That made traders optimistic that the Federal Reserve might reverse, or at least soften, its rate hike strategy.

Last week fresh US Inflation Data fell slightly, with the consumer price index decreasing by 0.1% in December on a monthly basis, in line with Dow Jones estimates.

“Bitcoin appears to have re-coupled with macro data as investors ignore the FTX crash,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC via email. .

“The most important macro data investors are focusing on are the weak services PMI and the downward trend in employment and wage data. This, coupled with a downward trend in inflation, has led to an improvement in sentiment, as it comes at a time when Bitcoin valuations.. …are near all-time lows The prospect of looser monetary policy amid stronger macro data low and low valuations is what led to this rally.”

The Fed raised borrowing rates seven times in 2022, forcing risky assets such as stocks — and tech stocks, in particular — to fall. In December, the benchmark fund rate rose to 4.25%-4.50%, reaching its highest level since 2007.

Bitcoin has been caught up in the market drama around lending rates as it is increasingly viewed by investors as a risky asset.

Backers have previously talked about bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin fell short of that target in 2022, slipping more than 60% as the United States and other major economies grappled with higher rates and higher costs of living.

Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a Jan. 13 note that this “raised hopes among market participants that the Fed would further slow the pace of rate hikes.”

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

This is because the risk of recession is also on the minds of central bankers.

About two-thirds of chief economists polled by the World Economic Forum think a global recession is likely in 2023, according to research released Monday by the Davos organizer.

The US dollar also depreciated, with the greenback losing 9% against a basket of currencies used by US trading partners over the past three months. The majority of bitcoins trade against the USD, which makes a weaker dollar better for bitcoin.

“We’re seeing the dollar peaking, inflation coming down, interest rate hikes slowing – all of this indicates that markets will take on more risk in the coming months,” Vijay Ayyar, vice chairman of the business and international development at crypto exchange Luno, CNBC told CNBC.

The “whales” buy BTC

According to Kaiko, the biggest buyers of digital coins known as “whales” could lead bitcoin’s latest rally.

The crypto data firm said in a series of tweets on Monday that trade sizes had risen from an average of $700 on Jan. 8 to $1,100 today on crypto exchange Binance, indicating renewed confidence in the market. walked by whales.

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Whales are investors who have accumulated large piles of bitcoins. Some are individuals, like MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers, which act as intermediaries in the exchanges between buyers and sellers.

Digital currency skeptics say this makes the market prone to manipulation by a select few investors with large token stacks. The 97 richest bitcoin wallet 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, told CNBC that bitcoin could see a “managed bull market” in 2023 in which bitcoin moves north of $30,000 in the first quarter and to $50,000 in the second half. His reasoning was that with trading volumes evaporating and the level of fear in the market extremely high, the whales would then step in to support the market.

Increased Bitcoin mining difficulty

There are also other factors at play.

Several bitcoin miners have been flushed out by the price drop. Bitcoin miners, who use power-hungry machines to verify transactions and create new tokens, have been squeezed by falling prices and rising energy costs.

This is historically a good sign for bitcoin, according to Ayyar.

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These players accumulate huge stacks of digital currency, making them one of the biggest sellers in the market. With miners unloading their holdings to pay off their debts, this removes much of the remaining selling pressure on bitcoin.

More recently, however, the “difficulty” of the Bitcoin network has increased, meaning more computing power is being deployed to release new tokens into circulation.

Mining difficulty hit a record high of 37.6 trillion on Sunday, according to data from BTC.com, meaning it would take an average of 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, market analyst at digital asset broker GlobalBlock, told CNBC.

“Bitcoin mining difficulty dropped 3.6% before the last update, after a winter storm caused some miners to shut down. However, miners now appear to be back online, with new machines more effective.”

2024 “halved”

Meanwhile, events lower in the crypto calendar could give traders reason to rejoice in the New Year. There’s still a year to go, but bitcoin’s so-called “halving” is an event that often sparks excitement. enthusiasm of crypto investors.

The halving, where bitcoin rewards for miners are halved, is seen by some investors as positive for the price of bitcoin because it reduces the supply.

“There are signs that this could be the start of a new cycle with Bitcoin, as it usually does around 15 to 18 months before halving,” Ayyar told CNBC.

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

However, Ayyar cautioned, “At this point, we are in overbought territory with Bitcoin so we could definitely see some downside.” Prices could fall if bitcoin closes below $18,000 in the coming days, he added.

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