Bitcoin’s price is up almost 30 percent against the dollar in January, raising hopes among its loyal followers that the crypto market is recovering from the credit crunch that has gripped it for much of the past year.
The token, the most actively traded in the industry, has surged above $21,000 over the past week, breaking the tight $17,000 range it was locked in after crypto exchange FTX collapsed in November.
The cryptocurrency has rallied alongside traditional financial assets like stocks and bonds this year as investors become increasingly confident that the Federal Reserve’s policy of rapidly raising interest rates to fight inflation is beginning to ease. Last week, the US consumer price index recorded a 6.5 percent inflation rate in December, the sixth straight month of decline.
Although Bitcoin enthusiasts argue that the token can be a hedge against inflation, it has often fluctuated over the past year in line with changes in consumer prices and interest rate expectations. The price started falling from its record high of nearly $70,000 in November 2021 as investors realized inflation was soaring.
“The overall rally in most asset classes year to date on hopes of a ‘soft landing’ for the US economy is boosting sentiment in crypto,” said Nikolaos Panigirtzoglou, JPMorgan’s managing director with a focus on alternatives and digital assets.
He added that a weakening dollar also helped, as it pushed up the price of commodities like gold, which in turn helped “re-evaluate bitcoin as a replacement asset class.”
The optimism has spread to other crypto-related assets. Ether, the second most traded cryptocurrency, is up 31 percent this month to above $1,575, according to Refinitiv data. The token is often used as a building block for ambitious crypto projects as it allows programmers to code functions to buy and sell assets automatically.
Overall, the market value of the top 500 crypto tokens has grown back to $1 trillion from $830 billion at the end of last year. It remains a long way from its November 2021 peak of over $3.2 trillion, according to data from the Financial Times Digital Assets Dashboard.
“If inflation comes down now, it will ease the pressure on the Fed and other central banks to aggressively raise rates, allowing for a smooth switch back to higher-risk strategies,” said Edmond Goh, head of trading at B2C2, a crypto market maker.
However, confidence in crypto markets remains fragile, in part as investors fear more sudden shocks following the collapse of Sam Bankman-Fried’s FTX.
“Some upside volatility should come at some point and doesn’t mean that this upside will be sustainable,” said David Moreno Darocas, head of research at data provider CryptoCompare.
In particular, the fate of Genesis, one of the largest lenders in the crypto market, is uncertain. The company halted customer withdrawals in its lending unit in November following the FTX default, blaming it on “unprecedented market turmoil” and owing its creditors more than $3 billion. Its parent company, crypto conglomerate Digital Currency Group, is trying to raise capital and avoid Genesis’ bankruptcy.
Other leading names, including crypto-focused bank Silvergate and crypto exchanges Coinbase and Crypto.com, said they were cutting staff levels extensively.
Market research provider Kaiko noted that prices have risen over the past week in part because traders who had been betting on Bitcoin going down had caught a brief squeeze, sending prices higher.
It also indicated that market liquidity, or the ability to easily buy and sell assets at prevailing market prices, remained very weak. Almost 90 percent of Bitcoin trades are conducted with stablecoins, tokens designed to track real-world currencies and hold constant value, it said.
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Liquidity for both bitcoin and ether, as measured by the number of offers to buy and sell the tokens within 2 percent of their price against stablecoin Tether, had fallen by a fifth since early January to levels seen after the FTX Fallout was observed, Kaiko found.
“It is unclear why liquidity temporarily recovered but did not persist, particularly in the last few days which have seen the highest trading volume since early November,” it said.
However, some see another possible shakeout as the final squeeze on a market that has been in a whirlwind since stablecoin TerraUSD’s sudden failure last May.
“In my view, Genesis is the last domino to shake since this sad contagion crisis with Terra began months ago,” said Ian Taylor, board advisor at CryptoUK, a British crypto lobbying group. “Even if Genesis files for bankruptcy, that’s sort of priced in.”
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