Why is Bitcoin (BTC) rallying in January?

A number of factors are behind Bitcoin’s surge at the turn of the year, according to analysts, including an increased likelihood of interest rates being cut and buying by large buyers known as “whales.”

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Bitcoin 2023 has started on a positive note as the price of the world’s largest digital token has increased by around 26% since the beginning of January.

On Saturday, bitcoin’s price surged above $21,000 per coin for the first time since November. 7.

It is still a long way off the record high of $68,990 that Bitcoin hit in November. 2021. But it has given market participants cause for optimism.

The month-to-date rally follows a dismal 2022 that saw major bankruptcies and scandals in the crypto industry, including the collapse of FTX, and a sharp pullback in the broader market amid central bank actions.

Analysts say a number of factors are behind Bitcoin’s turn-of-the-year surge, including an increased likelihood of interest rates being cut and buying by large buyers known as “whales.”

New year, new monetary policy?

Inflation is cooling and economic indicators are pointing to a slowdown in US economic activity. This has left traders optimistic that the Federal Reserve may reverse, or at least tone down, its rate-hiking strategy.

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Last week, new US inflation data showed a modest decline, with December CPI falling 0.1% on a monthly basis, in line with Dow Jones estimates.

“Bitcoin appears to have pegged back to macro data as investors shrug off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC via email.

“The key macro data that investors are focused on is the weak services PMI and the downtrend in jobs and wages data. This, coupled with the downward trend in inflation, has led to improved confidence, while this comes at a time when Bitcoin’s valuations are… are close to all-time lows. The prospect of looser monetary policy amid weaker macro data and low valuations has fueled this rally.”

The Fed has raised lending rates seven times in 2022, sending risky assets like stocks — and tech stocks in particular — into a tailspin. In December, the key interest rate rose to between 4.25% and 4.50%, the highest level since 2007.

Bitcoin has been caught up in the market drama surrounding lending rates as investors increasingly view it as a risky asset.

Supporters previously spoke of Bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin fell short of that goal in 2022, instead slipping more than 60% as the U.S. and other major economies grappled with higher interest rates and the cost of living.

Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a January. 13 note that this “raised hope among market participants that the Fed will further slow the pace of rate hikes.”

The Fed is likely to keep interest rates high for the time being. However, some market participants are hoping that central banks will start to slow the pace of rate hikes or even cut rates. Some economists are predicting that a Fed rate cut could occur later this year.

Because the risk of a recession also plays a role in the minds of central bankers.

Around two-thirds of the chief economists surveyed by the World Economic Forum consider a global recession to be likely in 2023, according to a study published by the Davos organizers on Monday.

The US dollar has also slumped, with the greenback down 9% over the past three months against a basket of currencies used by US trading partners. The majority of bitcoins are traded against USD, making a weaker dollar better for bitcoin.

“We’re seeing the dollar peaking, inflation easing, rate hikes slowing – all the signs are that markets are becoming riskier over the next few months,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno , said CNBC.

“Whales” buy BTC

According to Kaiko, larger digital coin buyers known as “whales” could lead the recent Bitcoin rally.

The crypto data firm said in a series of tweets on Monday that trade sizes on crypto exchange Binance have fallen from an average of $700 on Jan. 8 to $1,100 today, indicating renewed whale confidence in the market.

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Whales are investors who have hoarded large piles of bitcoin. Some are individuals, like MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers that act as intermediaries in trades between buyers and sellers.

Digital currency skeptics say this makes the market vulnerable to manipulation by a select few investors with large piles of tokens. According to fintech firm River Financial, the top 97 Bitcoin wallet addresses account for 14.15% of the total supply.

In December, Carol Alexander, a professor at the University of Sussex, told CNBC that Bitcoin could see a “managed bull market” in 2023, with Bitcoin rallying north of $30,000 in the first quarter and to $50,000 in the second half. Their reasoning was that when trading volume is low and fear is extremely high in the market, the whales would step in to support the market.

Bitcoin mining difficulties increase

Other factors also play a role.

Several bitcoin miners have been flushed out by the price drop. Bitcoin miners, who use power-hungry machines to verify transactions and mint new tokens, have been pressured by falling prices and rising energy costs.

According to Ayyar, this bodes well for Bitcoin historically.

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These players accumulate massive amounts of digital currency, making them the biggest sellers in the market. As miners dump their holdings to pay down debt, much of the remaining selling pressure on Bitcoin will be removed.

More recently, however, the “difficulty” of the Bitcoin network has increased, meaning that more computing power is used to bring new tokens into circulation.

Mining difficulty hit a record 37.6 trillion on Sunday, according to BTC.com data, meaning an average of 37.6 trillion hashes, or attempts, would be required to find a valid block of Bitcoin and add it to the blockchain .

“Bitcoin mining difficulty is a measure of how difficult it is to create the next block of transactions,” Marcus Sotiriou, market analyst at digital asset broker GlobalBlock, told CNBC.

“Bitcoin mining difficulty is down 3.6% before the last update after a winter storm caused some miners to shut down. Now, however, miners appear to be coming back online with new and more efficient machines.”

2024 ‘half’

Meanwhile, events further down the crypto calendar could give traders a reason for New Year cheer. It’s still a year away, but the so-called Bitcoin “halving” is an event that often causes excitement among crypto investors.

The halving, which sees bitcoin rewards for miners cut in half, is viewed by some investors as a positive for bitcoin price as it depresses supply.

“There are indications that this could be the start of a new cycle with Bitcoin, as is usually the case around 15-18 months before the halving,” Ayyar told CNBC.

The next halving is scheduled to occur sometime between March and May 2024.

However, Ayyar warned, “At this point, we are in overbought territory on bitcoin, so we could definitely see a pullback.” Prices could drop if bitcoin closes below $18,000 in the next few days, he added.

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