Bitcoin has risen 30% in the first weeks of January after closing out 2022 with some of the worst declines in cryptocurrency history.
As the calendar switched to 2023, cryptocurrency was in the throes of a deep and dark winter. The value of nearly every digital asset, including bitcoin and ethereum, plunged greatly last year as investors pulled their funds. But cryptocurrencies have been staging a rally.
On New Year’s Day, bitcoin was trading at about $16,500 and was generally below $17,000 for the stretch of time since cryptocurrency firm FTX’s dramatic implosion in mid-November. But on Monday, the flagship digital asset was trading at about $21,300 — a gain of nearly 30%. Ethereum, the second-largest cryptocurrency, has increased by more than 30% during that same period.
In addition, the combined market value of all cryptocurrencies passed the $1 trillion mark for the first time since FTX’s collapse.
A lot of the rally is likely tied to actions by the Federal Reserve. The Fed jacked up rates all throughout 2022, causing investors in several asset classes to pull back and make less risky bets, but this new year has so far offered a bit of good news for the central bank.
An encouraging inflation report for December, coupled with news of labor market resiliency, is raising hopes that the economy might avoid a recession. Inflation slowed to 6.5% in the 12 months ending in December, the Bureau of Labor Statistics reported last week. On a month-to-month basis, prices fell by a tenth of a percentage point. That was right in line with expectations and shows that inflation is meaningfully cooling.
While inflation is still well above the Fed’s 2% target, the decline at least shows that the barrage of aggressive rate hikes is beginning to filter through the economy and means that the central bank will likely begin to slow the pace and intensity of rate hikes.
That’s important because higher rates generally lower the value of risk assets such as stocks and, as the past year showed, digital tokens. In downturns, investors typically flee risky investments in favor of safer and more stable stores of value. Bitcoin and other cryptocurrencies are still a new asset class, and those who have invested in the coins have been selling off their holdings for fear they will crash, resulting in a chain reaction effect.
“Bitcoin looks to have recoupled with macro data as investors shrug off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC.
Investors are betting on a more muted rate hike at the end of this month than the half percentage point increase tacked on by the Fed in December.
Over a three-month stretch, the dollar is also down 9% against other currencies and, because most bitcoin trades are against the dollar, the decline is better for the digital asset.
“We are seeing the dollar put in a top, inflation easing, interest rate hikes slowing down – all pointing to markets getting more risk-on over the next few months,” said Vijay Ayyar, vice president of corporate development and international at cryptocurrency exchange Luno.
Stocks are also up.
The S&P 500 has increased by more than 4% since the start of the new year, while the tech-heavy Nasdaq has grown by nearly 6% since then.
Still, bitcoin and other cryptocurrencies have quite a distance to climb to regain the highs reached during 2021, which was a banner year for crypto. That November, bitcoin hit a record-high of $69,000.