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Bitcoin has had a tough 2022. Now, investors are looking at 2023 with caution when it comes to cryptocurrencies.

Thomas Trutschel | Photo library | Getty Images

Bitcoin rose further over the weekend as traders took the news of yet another crypto bust in their stride and placed bets on a Federal Reserve “pivot” to lower interest rates.

The price of the #1 token briefly topped $23,000 for the first time since Aug. 19, 2022, according to data from CoinGecko. It has since declined slightly to $22,859.20. The jump has sent bitcoin up nearly 39% since early January.

Ether, the second-largest digital coin, hit $1,664.78 on Saturday — the first time it topped $1,600 since Nov. 7, 2022. As of 6:40 a.m. ET, ether was worth $1,639.30 each.

Bitcoin started 2023 on a high note, with investors hoping for a reversal from the monetary tightening that spooked market participants last year.

The Fed and other central banks began cutting interest rates in 2022, shocking holders of risky asset classes, like stocks and digital tokens. Publicly traded tech stocks and private venture capital-backed start-ups have been battered in particular, as investors seek protection in assets perceived to be safer, such as cash and bonds.

With inflation now showing signs of easing in the United States, some market participants are hopeful that central banks will begin to slow the pace of rate hikes, or even cut rates significantly. Economists previously told CNBC they predict a Fed rate cut could happen this year.

“Fed tightening appears to be milder and inflation less risky,” Charles Hayter, CEO of crypto data site CryptoCompare, said in comments emailed to CNBC. “There is hope that there will be more caution in rate hikes globally.”

The Fed is likely to keep interest rates high for now. However, some bank officials have recently called for a reduction in the scale of quarterly rate hikes, wary of a slowdown in economic activity.

According to Vijay Ayyar, Vice President of Corporate Development and International at Luno, the world’s first digital currency, bitcoin, “looks more and more like it’s gotten into its bottom.”

Bitcoin short sellers have been squeezed by sudden price increases, according to Ayyar. Short selling is an investment strategy in which traders borrow an asset and then sell it in the hope that it will depreciate.

The erasure of these short positions triggered by bitcoin’s rising price has added “fuel to the fire,” Ayyar said, as short-sellers are forced to hedge their bets by buying back bitcoin borrowed for them. to close.

What Crypto Collapse?

Investors don’t seem to have been much disturbed by the collapses of major crypto companies, stemming from the fallout from the insolvency of digital currency exchange FTX in November.

Last week, the lending arm of New York-based crypto investment firm Genesis became the latest victim of the crypto crisisseeking bankruptcy protection in a “mega” filing listing aggregate liabilities ranging from $1.2 billion to $11 billion.

“The Genesis debacle has been unfolding for some time and is likely already priced in. FTX, on the other hand, has already had a significant impact on many investors, market psychology, and the prices of several toxic assets,” Mati Greenspan, founder and CEO of crypto investment advisory firm Quantum Economics, told CNBC.

“It should be noted, however, that the price of bitcoin itself is quite constrained since FTX did not have any on its balance sheets.”

Bitcoin is still around 67% off its all-time high, despite its recent surge.

The latest crypto plunge is different from previous cycles, largely due to the role leverage played. Major crypto players have found themselves enmeshed in risky lending practices, offering high returns that many investors now deem unsustainable.

It started in May with the collapse of terraUSD – or UST – an algorithmic stablecoin that was supposed to be pegged one-to-one with the American dollars. The UST failure sent terraUSD’s sister token, luna, plummeting and hit companies exposed to both tokens.

Three Arrows Capital, a hedge fund with bullish views on crypto, put into liquidation due to its exposure to terraUSD.

Then came the FTX Collapse in November, one of the largest cryptocurrency exchanges in the world. It was led by Sam Bankman-Fried, an executive often in the spotlight.

The fallout from FTX continues to ripple through the cryptocurrency industry. Around $2 trillion in value has been wiped from the overall crypto market since the peak of the crypto boom in November 2021, in a deep downturn known as “crypto winter”.

An analyst has warned that technical indicators suggest there may be some pullback from the token’s recent rally.

Yuya Hasegawa, crypto market analyst at Japanese bitcoin exchange Bitbank, said that while bitcoin’s trend indicators “generally signal a strong uptrend”, its relative strength indicator, or RSI, “s deviates from the upward movement of the price and begins to slide downwards, which is not a good sign for the current price trend.”

“Bitcoin could test its August high and be supported at the $20,000~$21,000 level, but with its RSI diverging and some big tech gains coming this week, it could get quite choppy,” he said. Hagesawa in a Monday note.

The recent rally in bitcoin’s price has nonetheless given some investors hope that the ice may be starting to melt.

Greenspan said bitcoin’s bull moment is typical of cryptocurrency, as investors anticipate the next so-called “halving” event – a change to the bitcoin network that cuts miner rewards in half. It is seen by some investors as a positive for the price of the token, as it reduces supply.

The next halving is expected to take place between March and May 2024.

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