Prepared by: Hisham Mukhaneh
Bitcoin started its new year very well, and the most popular currency crossed the $24,000 barrier, before it retreated slightly and settled above $23,000.
Although the price is still a far cry from the record set in November of 2021, which was $68,990 per unit, it gave players in the market an outlet with some optimism.
The rally in the price of the world’s largest digital token to date comes after a tumultuous 2022, which saw major bankruptcies and scandals in the cryptocurrency industry, including the collapse of FTX, and sharp declines in the broader market on the back of US central bank actions.
From here, analysts believe that a number of factors were behind the rise in Bitcoin for the new year, including the increased possibility of interest rate cuts, and purchases by large buyers known as “whales”.
New year, new monetary policy
Inflation rates are on a downward trend, and economic indicators point to a slowdown in US economic activity. This makes traders optimistic that the Fed can reverse, or at least moderate, its rate hike strategy.
New US inflation data showed a modest decline last week, with the consumer price index falling by 0.1% in December on a monthly basis, in line with Dow Jones estimates.
James Butterville, head of research at digital asset management firm Quinshares, said: “The main macro data that investors are focusing on is the weakness in the Services PMI and the decline in employment and wages data. This, along with the downward trend in inflation, has improved confidence, while it comes at a time when Bitcoin valuations are near all-time lows.” He considered that the prospect of more accommodating monetary policy on the back of weaker macro data and lower valuations is the reason for the currency’s appreciation.
The Fed had raised borrowing rates seven times in 2022, which has depressed risky assets like technology stocks in particular. As a result, Bitcoin was caught in a quandary in terms of lending rates, as investors increasingly viewed it as a risky asset, after it failed to prove its potential as a “hedge” to buy in times of high inflation. Instead, it fell by more than 60% as the United States and other major economies grappled with rising rates and the cost of living.
Although the Fed is likely to keep interest rates high for the time being, some market players are hopeful that central banks will start easing interest rate hikes and lower rates as soon as this year.
Falling dollar
The US dollar’s decline of 9% against a basket of currencies used by US trading partners in the past few months has resonated positively in the Bitcoin halls. This is given that the majority of bitcoins are traded against the dollar, which makes its decline better for the valuation of the cryptocurrency.
Vijay Aiyar, Vice President of Corporate Development and International at crypto platform Luno commented, “We are seeing a resurgence in the dollar, slowing inflation, and an expectation of lower interest rates, all of which point to an increase in risk in the markets over the next few months.”
The role of the “whales”… who are they?
The largest buyers of cryptocurrencies, known as “whales,” may be driving the currency’s latest rally, according to digital asset data provider Caico, which said trading volumes on the Binance platform jumped from an average of $700 on Jan. $1100 today, indicating renewed confidence in the market by whales. Who are these?
It’s a term for investors who hold large amounts of bitcoin, some of them individuals, such as Michael Saylor, CEO of MicroStrategy, and Silicon Valley investor Tim Draper. Others are entities such as market makers, who act as intermediaries in deals between buyers and sellers.
But cryptocurrency skeptics argue that this makes the market vulnerable to manipulation by a select few investors with large stacks of tokens. The 97 entities with the richest bitcoin wallets account for 14.15% of the total supply, according to fintech firm River Financial.
Mining difficulty
Other factors also played a role in the recent bitcoin price hike. One of them is getting rid of many digital bitcoin miners due to the price drop. Those who use energy-intensive machines to verify transactions and mint new tokens are being squeezed by stagnant prices and rising energy costs. This in itself is a good sign historically for the most valuable currency in the world, according to Aiyar from “Luno”.
To be more clear, digital miners hold huge amounts of cryptocurrency, which makes them some of the biggest sellers in the market. And with their recent massive exits and selling of what they own to pay down debt, much of the remaining selling pressure on Bitcoin has been removed.
Mining difficulty reached a record high of “37.6 trillion random cryptographic hashes” last Sunday, according to BTC.com data, which means that, on average, it would take 37.6 trillion hashes or attempts to find a valid Bitcoin block and add it to the block chain.
“Bitcoin mining difficulty is a measure of how difficult it will be to generate the next set of transactions,” said Marcus Soterio, market analyst at digital asset firm GlobalBlock.