Bitcoin’s price rose nearly 30 percent against the dollar in January, and hopes have risen among its loyal followers that the crypto market is recovering from the credit crunch that gripped it for much of last year.
The most actively traded token in the industry surged above $21,000 last week and broke the tight range of around $17,000 where it was fixed after the collapse of the FTX crypto exchange in November.
This cryptocurrency It joined traditional financial assets such as stocks and bonds this year as investors began to trust more and more that the Federal Reserve’s policy of rapid rate hikes to combat inflation is beginning to soften. Last week, the US consumer price index recorded its sixth consecutive decline in December with an inflation rate of 6.5 percent.
Despite bitcoin Enthusiasts argue that the token could be a hedge against inflation, having fluctuated frequently over the past year in line with changes in consumer prices and interest rate expectations. The price began falling from a record high of about $70,000 in November 2021, when investors noticed inflation rising.
“The overall rally in most asset classes to date is boosting sentiment in crypto, amid prospects for a ‘soft landing’ for the US economy,” said Nikolaos Panigirtzoglou, managing director of JPMorgan, which focuses on alternatives and digital assets.
He added that a weakening dollar is helping as it pushes up the prices of commodities like gold, which in turn helps “reprice bitcoin as a backup asset class.”
The optimism has spread to other crypto-related assets as well. Ether, the second most traded cryptocurrency, has risen 31 percent this month to over $1,575, according to Refinitiv data. The token is widely used as a building block for ambitious crypto projects because it allows programmers to code functions to buy and sell assets automatically.
Overall, the market cap of the top 500 cryptocurrencies increased from $830 billion at the end of last year to $1 trillion. It lags far behind its November 2021 peak of over $3.2 trillion, according to data from the Financial Times Digital Assets Dashboard.
“If inflation is now declining, pressure on the Fed and other central banks to increase rates aggressively will ease, providing a smooth transition to more ‘risk-based’ strategies,” said Edmond Goh, head of trade at B2C2, a cryptocurrency. market maker
However, confidence in crypto markets remains fragile, in part as investors are wary of further shocks after the collapse of Sam Bankman-Fried’s FTX.
“Some upside volatility would eventually come, and that doesn’t mean the upside will be sustainable,” said David Moreno Darocas, research lead at data provider CryptoCompare.
In particular, the fate of Genesis, one of the largest lenders in the crypto market, is uncertain. In November, it stopped client withdrawals at its lender, blaming “unprecedented market turmoil” after FTX’s failure and owed more than $3 billion to its creditors. Its parent company, the crypto conglomerate Digital Currency Group, is trying to raise capital and avoid Genesis’ bankruptcy.
Other prominent names, including crypto-focused bank Silvergate and crypto exchanges Coinbase and Crypto.com, have said they will reduce staffing extensively.
Research organization Kaiko stated that prices rose partially last week because traders who bet that Bitcoin would fall were caught in a short squeeze, causing prices to rise.
He also pointed out that the market liquidity or ability to easily buy and sell assets at prevailing market prices remained very weak. It was stated that about 90 percent of Bitcoin trading is carried out using stablecoins, which are tokens that aim to track real-world currencies and maintain a stable value.
Liquidity for both bitcoin and ether, as measured by the number of offers to buy and sell 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. , Kaiko found.
It is not clear why liquidity has temporarily recovered and failed to hold, especially in the last few days, which saw the highest trading volume since the beginning of November.
But some see another possible market shake-up as the latest squeeze in a market that has been caught in a whirlwind since the sudden failure of the TerraUSD stablecoin last May.
“I think Genesis is the last domino to rock since this sad contagion crisis started months ago with Terra,” said Ian Taylor, a board advisor to British crypto lobby group CryptoUK. “Even if Genesis files for bankruptcy, it comes at a price.”
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