Bitcoin has made a phenomenal comeback, but the crypto rally is in danger

• Bitcoin is off to a “phenomenal” start to the year, up almost 50% after tanking in 2022.
• The cryptocurrency has shaken off tremors triggered by high-profile failures such as FTX’s implosion.
• But investors’ growing acceptance of further US interest rate increases going forward will slow the recovery.

Bitcoin has gone from strength to strength this year after a nightmarish 2022, but the growing gloom over the possibility of more US interest rate hikes is putting the rally at risk.

The world’s largest cryptocurrency by market capitalization has shaken off the shock of last year’s high-profile crypto bankruptcies, including Three Arrows Capital and FTX, which shook confidence in the sector.

“It’s been a phenomenal start to 2023 for bitcoin,” OANDA analyst Craig Erlam told Insider.

The token’s price has risen about 48% so far this year to $24,012, according to CoinMarketCap data at last check on Wednesday, about halfway through March 2022 high of $47,152. It has recovered 25% of last year’s losses in just seven weeks.

It plunged 64% in 2022 thanks to high interest rates, recession fears, as well as the fallout from concerns that insolvency and other financial problems facing FTX would spread throughout the crypto world.

While the rally so far this year appears to be driven by increased investor appetite for risk assets as inflation cools, that is not the only factor, according to Erlam.

“Bitcoin’s rally has been particularly extraordinary, and what caused it so much trouble towards the end of 2022 may be driving the strong rally now,” he said.

“What I’m referring to at the end of the year is the FTX collapse and the prospect of contagion/exposure of other bad actors that were nowhere near as bad as feared,” he added.

FTX’s implosion rocked crypto markets last year, triggering a wave of bankruptcies among companies linked to the exchange. It has also sparked a backlash against the industry as regulators seek to protect consumers from further financial harm.

Ultimately, both the crypto crash and tighter regulations pave the way for a healthier industry going forward, experts have argued. MicroStrategy founder and bitcoin bull Michael Saylor suggested that FTX’s meltdown had a silver lining, because it has flushed out bad actors and is helping the crypto world “grow up.”

Just this month, the Securities and Exchange Commission charged crypto firms Genesis, Gemini and Kraken with selling unregistered securities.

Erlam suggests that such events have come as little surprise to crypto investors and have not deterred them from piling into bitcoin.

“So not only has bitcoin bounced back, it has done so fiercely and many will now question whether the worst is behind it,” Erlam said.

Pain ahead

But all is not rosy for crypto this year. According to Fawad Razaqzada, a market analyst at City Index, concerns about the global economy overheating could spell pain for bitcoin ahead.

The U.S. economy, for one, is a little too strong for some investors’ tastes, suggesting that the Federal Reserve’s aggressive rate hikes haven’t had the dampening effect policymakers want.

That has weighed on crypto prices, as investors become increasingly convinced that interest rates will stay higher for longer. Bitcoin has moved around 2.6% lower over the past 24 hours on Wednesday, although it is still up around 8.5% over the past seven days.

Inflation has slowed from the 40-year high of 9.1% annual rate reached last year, but remains well above the Fed’s 2% target, coming in at 6.4% in January. Meanwhile, retail sales and wages have risen, and unemployment is falling.

This may require further interest rate increases from the US central bank. Goldman Sachs sees the Fed making three more hikes this summer. It has already taken the target rate from near zero to up to 4.75% over the past year.

Higher interest rates usually do not bode well for cryptocurrencies, as investors may be attracted to the safer returns offered by lower-risk assets.

With further interest rate hikes expected to weigh on the US economy, it has raised concerns that the Fed will tip the US into recession.

“If concerns about growth intensify, cryptoassets may struggle to sustain this recovery,” Razaqzada told Insider.