After a prolonged period of uncertainty and general malaise in the crypto market, it appears that things are finally looking up for Bitcoin as of mid-January 2023, despite fears of a deep global recession brought on by central banks’ quantitative tightening efforts in 2022. At the time of writing Bitcoin has hit the $23,000 mark and its Cinderella transformation this month already has TradFi heavyweights like Goldman Sachs anointing it as the best performing asset of 2023. In turn, it has ignited the altcoin market in its wake, with leading contenders trending up in price in excess of 50%.
The Bitcoin Fear & Greed Index (FGI) has departed the “fear” zone and entered “neutral” territory, which hasn’t happened since April 2022. This is a significant development, as it indicates that market sentiment may be shifting. Bulls are climbing out the woodworks.
Bitcoin hit a score of 52 on the FGI as it climbed above $21,000 – not nothing given that BTC began the year in the “extreme fear” zone. What’s even more striking is that the world’s-oldest cryptocurrency has retaken the ground it held before the collapse of the exchange FTX, which had resulted in BTC trading in a $15,600-$17,200 range for the last two months of 2022. To top it off, Bitcoin mining has even become profitable again.
Of course, the question on everyone’s mind is whether this trend will last – what’s behind it, after such a long period of crypto markets being stuck following the FTX fallout.
Crypto markets move in mysterious ways usually only deciphered afterwards with reasons bandied around ranging from Lunar New Year-driven investing to institutional investment. However with such a radical turn in sentiments, an analysis is in order. Let’s take a closer look at what’s possibly driving this Bitcoin recovery and its effects. Please note this article does not constitute financial advice of any kind and is for educational and entertainment purposes only.
In the view of many observers, the recent upward movement in the value of Bitcoin can be largely attributed to the sustained decrease in inflation rates in the United States as revealed by the Consumer Price Index (CPI). The U.S. Federal Reserve has been pushing severe measures to control inflation since March 2022, resulting in falling prices for risk assets like tech stocks and especially crypto.
Last December, the Fed hiked interest rates by 50 basis points, a relative leveling off compared to the 75-basis-point hikes preceding it in several earlier rounds in 2022. According to the new Consumer Price Index (CPI) report by the Bureau of Labor and Statistics, December saw inflation drop to 6.5%, down from 7.1% in November.
A drop of this magnitude had not been seen in over two years, and the upbeat CPI report is a significant contributor to the rally in Bitcoin’s price. Equities traders are also charged up by the data, sending stock prices higher with the hope a milder Fed policy might emerge from the organization’s next meeting. Bitcoin’s price tends to correlate closely with equities and in particular tech stocks.
Institutional waiting game
Despite the upward trend in Bitcoin’s price, which increased by 23% in a week, it seems institutional investors are not yet playing a major role. Research by blockchain analytics firm CryptoQuant found institutional investors are so far sitting this one out. One analyst at the firm explained that a lack of unusual activity in three indicators – the Fund Volume index, Fund Holdings Index, and Over-The-Counter (OTC) transactions – points to the absence of an institutional buying spree at present. Moreover, many traditional financial institutions have not yet finalized the internal guardrails required for them to invest in crypto, and they cannot jump into the market ahead of that.
Elsewhere in the market, the crypto data platform Coinglass showed that the Grayscale Bitcoin Trust (GBTC), the biggest institutional investment option available for Bitcoin, as of mid-January was trading at a discount compared to its net asset value at 36.26%. Its parent company DCG still has an uphill battle with regulators over its desire to turn GBTC into an exchange-traded fund (ETF) based on Bitcoin spot prices.
Just a bear market rally?
Bitcoin’s recent price surge, while encouraging, may be facing headwinds from various industry-wide challenges. These include the contagion of last year’s crypto headlines that continue to impact crypto markets; looming regulation in the European Union and regulation from the US; the unresolved troubles at Digital Currency Group and elsewhere; and a potential recession all means this rally has a lot stacked against its continuation.
Additionally, other global indicators such as Google search traffic for the term “Bitcoin” – which is still at its lowest since December 2020 – may hint that the broader public is not exactly in the driver’s seat of the current rally.
Optimism for the new year
Despite the challenges facing the crypto market, there is still cause for optimism. One of the biggest factors that could drive an ongoing rally is the belief that the Fed will roll out smaller interest rate hikes over the course of the year.
In a statement, the Fed has indicated it may shift its policy in response to inflation, saying they anticipate ongoing increases in the target range will be appropriate to attain a stance of monetary policy sufficiently restrictive to gradually bring inflation back down to 2%. The Fed also stated that they would consider the cumulative tightening of monetary policy, the lag in monetary policy’s impact on economic activity and inflation, and economic and financial developments when deciding the pace of future hikes in the target area.
Furthermore, according to CME Group, a leading derivatives marketplace, there is a strong chance the rate hikes coming up may not be as intense as had been thought, a positive sign for risk assets. While crypto is known for its wily and unpredictable nature, with potentially smaller rate hikes and a Fed strategy seen as working, investors may be more willing to take a chance.
With so many positives happening this year across the space, such as Ethereum continuing to build out new smart contract-powered frontiers, 2022’s contagion gradually getting flushed out and with 2024’s next Bitcoin Halving beginning to come into focus, 2023 is shaping up to be as pivotal a year as 2019 was to get your portfolios in order in preparation for the next wave of crypto mainstream adoption.