Bitcoin Soars as Investors Return to Riskier Assets

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Bitcoin’s price jumped nearly 30% against the dollar in January, sparking hopes among its loyal supporters that the crypto market is emerging from the credit crunch that has gripped it for much of the past. last year.

The token, the most actively traded in the industry, soared to over $21,000 last week, breaking out of the narrow range of around $17,000 it settled on after the exchange crashed. of FTX crypto in November.

The cryptocurrency has joined traditional financial assets such as stocks and bonds in rallying this year as investors grow more confident that the US Federal Reserve’s policy of rapidly raising rates to fight inflation begins to moderate. Last week, the US consumer price index posted an inflation rate of 6.5% in December, the sixth consecutive month of decline.

Although bitcoin enthusiasts claim the token can be an inflation hedge, over the past year it has often fluctuated with changes in consumer prices and interest rate expectations. ‘interest. The price began to fall from its all-time high of nearly $70,000 in November 2021 when investors realized inflation was skyrocketing.

The global rally in most asset classes since the start of the year on hopes of a soft landing for the US economy is boosting sentiment towards crypto, said Nikolaos Panigirtzoglou, managing director of JPMorgan Specialty. in alternatives and digital assets.

He added that a weakened dollar also helped because it drove up the price of commodities such as gold, in turn helping to revalue bitcoin as a substitute asset class.

The optimism extended to other crypto-related assets. Ether, the second most traded cryptocurrency, rose 31% this month to over $1,575, according to data from Refinitiv. The token is widely used as a building block for ambitious crypto projects as it allows programmers to code functions to automatically buy and sell assets.

Overall, the market value of the top 500 crypto tokens has rebounded to $1 billion from $830 billion at the end of last year. It remains well below its November 2021 peak above $3.2 billion, according to data from the Financial Times Digital Assets Dashboard.

If inflation eases now, pressure on the Fed and other central banks to aggressively raise rates will be reduced, allowing a smooth return to riskier strategies, said Edmond Goh, head of trading at B2C2, a crypto market maker.

However, confidence in the crypto markets remains fragile, in part because investors are wary of further sudden shocks following the collapse of Sam Bankman-Frieds FTX.

Some upside volatility was bound to happen eventually and doesn’t mean that rise will be sustainable, said David Moreno Darocas, head of research at data provider CryptoCompare.

The fate of Genesis, one of the biggest lenders in the crypto market, in particular, is uncertain. It halted customer withdrawals from its lending unit in November after FTX failed, blaming unprecedented market turmoil and owing creditors more than $3 billion. Its parent company, crypto conglomerate Digital Currency Group, is trying to raise capital and stave off bankruptcy for Genesis.

Other big names, including crypto-focused bank Silvergate and crypto exchanges Coinbase and Crypto.com, said they would cut staff significantly.

Research provider Kaiko noted that prices rose last week in part because traders betting on bitcoin’s fall were caught in a short squeeze, pushing prices higher.

He also pointed out that market liquidity, or the ability to easily buy and sell assets at prevailing market prices, remained very low. Nearly 90% of bitcoin trading is done using a stablecoin, tokens meant to track real-world currencies and maintain stable value, he said.

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Bitcoin and ether liquidity, measured by the number of offers to buy and sell the tokens at less than 2% of their price against the stablecoin Tether, had fallen by a fifth since early January to levels seen following fallout from FTX. , found Kaiko.

It’s unclear why liquidity temporarily recovered but didn’t stay, particularly in the past few days, which saw the highest trading volumes since early November, he said.

But some see another possible market upheaval as the latest squeeze from a market that has been caught in a whirlwind since the sudden failure of stablecoin TerraUSD last May.

In my opinion, Genesis is the latest domino to falter since this sad contagion crisis with Terra began months ago, said Ian Taylor, adviser to the board of CryptoUK, a British crypto lobby group. Even though Genesis files for bankruptcy, its price is kind of priced in.

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