Explore the catalysts behind the latest revival of the cryptocurrency market. Uncover the driving forces and key factors influencing the resurgence of digital assets. Stay informed on the dynamics shaping the cryptocurrency landscape and understand what has propelled this notable comeback. Dive into the reasons behind the market’s latest upswing and stay ahead in the ever-evolving world of cryptocurrencies.
In a decade, Bitcoin and other cryptocurrencies have gone from obscure online novelties to trillion-dollar technologies. Investors hold them as speculative investments or as an anti-inflation hedge because each one has a fixed number of coins in circulation – 21 million to be exact.
After crashing last year, Bitcoin is back. Excitement over possible spot bitcoin ETFs and the upcoming halving of mining rewards are driving the rally.
What’s driving the price up?
Bitcoin is a highly volatile investment, and it’s not uncommon for it to experience quick peaks and troughs. This is because it is a highly decentralized asset that has no central authority to regulate prices or keep supply consistent. Its track record of volatility and craziness is why many investors steer clear of it, but those who are willing to put in the work and time can reap significant gains.
One of the main drivers of cryptocurrency price movements is fear and greed. Investors often panic sell or buy, influencing demand and pushing prices up. This is why it is important to do your research and find a trustworthy exchange to purchase from.
Cryptocurrency markets are also driven by regulatory changes, which can cause significant fluctuations in price. For example, the introduction of new stablecoins (like tether and USDCoin) can have a major impact on price because they dilute the market’s supply by bringing in investment dollars from other coins. However, new stablecoins can also add value to the ecosystem by allowing people to store their funds more securely.
Lastly, bitcoin’s price has been driven by anticipation of a spot ETF approval and the upcoming halving event in 2024, which will reduce the amount of new cryptocurrency that is produced each year. The halving is widely expected to drive prices up, as it will create scarcity and attract more buyers to the market.
Overall, the price of Bitcoin has been boosted by several positive events and a recovery in the global economy. In addition to the reversal in interest rates, the collapse of regional banks like Silvergate and Signature Bank during the COVID-19 pandemic rekindled fears over the stability of fiat currency, boosting demand for alternatives.
The CoinMarketCap Fear and Greed Index, which tracks sentiment among investors, has remained in the “greed” zone since early December, indicating that investors are feeling more confident than cautious. This has been aided by an increase in futures trading volume, which has pushed the total market capitalization of all cryptocurrencies to its highest level this year.
Has it reached its peak?
A month after a harrowing collapse of the bitcoin exchange FTX left investors facing shattered accounts, the cryptocurrency is enjoying a newfound luster. Analysts credit rising demand for stablecoins, which offer an alternative to volatile crypto tokens, and the US Securities and Exchange Commission’s approval of a spot bitcoin ETF for its resurgence. The latter has opened up the market to a wave of newcomers and spread optimism over the prospect of further gains for the digital asset.
But it’s worth remembering that Bitcoin has a history of volatile price swings, and the wider crypto sector has been prone to sudden crashes in recent years. Sometimes these are due to internal issues within the industry, such as the implosion of crypto exchange FTX in 2022, while other times they’re caused by macroeconomic factors like interest rates and inflation.
The price of bitcoin slumped late last year when the Federal Reserve announced it would begin tapering its bond purchases, draining liquidity from financial markets. That, along with expectations of higher inflation and interest rates, sparked a sell-off in risky assets, including stocks and high-growth companies. Bitcoin’s price fell to below $13,000 in November.
In the aftermath of that collapse, cryptocurrencies were battered by concerns over security and regulatory uncertainty. The collapse of stablecoin terraUSD, which caused the bankruptcy of Singapore hedge fund Three Arrows Capital, further dented investor confidence. But the price of bitcoin rebounded this year, climbing above $64,000 in mid-April as promises of endless liquidity from the Fed gave markets – and cryptos – unbridled optimism.
Those early gains were amplified by bullish bets placed in the derivatives market, which allow traders to leverage their positions up to 100 times. However, those long positions have been liquidated in recent days as the price reversal hit home.
Other developments have boosted sentiment, too. For example, WhatsApp has begun work on a so-called stablecoin that will let users transfer money between each other without incurring any transaction fees. The company is working with crypto startup Binance to create the coin, which will initially be pegged to other currencies to avoid price volatility. It will roll out to some users of its popular messaging app and will be available on the platform’s desktop site, as well as in the Android and iOS apps.
Is it a bubble?
A bubble occurs when prices rise without any underlying economic or technological reason. This often prompts people to invest, sometimes recklessly, in the hopes of making a quick profit. Then, when the price falls, those who were greedy enough to jump on the bandwagon will sell, and the market will collapse.
Bitcoin has been a hotbed for speculation and has been subjected to the same up-and-down cycles as any other asset. Some academics have been able to use data on cryptocurrency to document several bubble periods. But cynics will point out that cryptocurrencies are not tied to any real assets, and they don’t generate any income. They are a purely speculative instrument, much like a stock or a house, but with an even bigger risk.
The allure of cryptos was strengthened when central banks around the world sharply raised interest rates through 2022, which made conventional investments more lucrative. Investors’ appetite for high-risk assets shrank as a result, leading to a collapse in growth stocks and a decline in Bitcoin.
Cryptos have also attracted populist support and commercial interest, largely because they are decentralized. They can be transferred quickly and anonymously across borders, and are not subject to the same regulatory framework as traditional fiat currencies. This makes them attractive to libertarians, anarchists, and gold bugs, who are seeking a haven asset that is immune from macroeconomic vagaries and political instability.
But they have also been used for illegal activities, including money laundering and tax evasion. Some governments have cracked down on this, and there are concerns that it could be used to finance terrorism or sanctions evasion.
But despite these risks, many experts have argued that it is unlikely to be the next financial bubble. There are too many different factors at play. Mainstream media outlets and social media influencers have helped to spread the word, and FOMO has fueled the hype. And, unlike the tulip bubble of the 1700s or the Great Recession in the 1930s, it’s not being driven by excessive debt. Instead, it seems to be the result of a combination of supply and demand, with those who want to own Bitcoin as an investment buying from others who want to trade it for cash.
What’s next?
Despite gyrating prices and little to no regulation, Bitcoin remains an intriguing prospect for many. Developments like President Joe Biden’s desire to explore a digital US dollar and multimillion-dollar Super Bowl ads demonstrate that powerful institutions are keen to legitimize crypto as a mainstream asset.
But, as with all assets, price fluctuations can be volatile and cryptos are prone to quick crashes. The cause of some of these crashes can be systemic (like the collapse of FTX) or caused by macroeconomic factors (interest rates, inflation).
In 2022, the bitcoin price plunged as interest rate rises dampened investor appetite for high-risk assets and drove people back into safe government bonds and traditional investments. Other events pushed the price lower, including the crash of crypto-focused banks Silvergate and Signature as well as the scandal around Terra Stablecoin and the collapse of Three Arrows.
However, early 2023 has seen a revival in Bitcoin’s price with many factors at play. For starters, there are hopes that the SEC will approve the first spot bitcoin ETF. The US Federal Reserve also seems to have reached the peak of its rate-hike cycle, which may help investors take more risk with their investments.
Another big event is the Bitcoin halving, which is due to happen in early to mid-2024. This will reduce the rate at which new coins are created and has historically signaled a bullish market trend.
The final factor that could push the price up is an improving cryptocurrency climate. This includes greater acceptance of the currency, a rise in investment funds, and the increasing presence of large corporations looking to explore blockchain technology.
Nevertheless, there are plenty of challenges for the Bitcoin price to overcome. Its enormous energy consumption continues to be a concern, as is the environmental impact of mining it. Fortunately, there are efforts to tackle these problems, such as a mothballed coal plant in upstate New York being converted to run-on gas for bitcoin mining and a power company striking an agreement with a renewable energy provider in Texas. These factors should give the price a boost shortly, but its long-term prospects remain uncertain.