Analysis: What’s behind bitcoin’s latest surge?

LONDON, March 22 (Reuters) – At the turn of the year, bitcoin was in the grip of a bleak midwinter, down and out after a 2022 defined by falling crypto prices, bankruptcies and corporate scandals.

Less than three months later, bitcoin has regained its mojo. With gains of more than 70% so far this year, it has outperformed other major assets, trading near nine-month highs on Wednesday.

The original and largest cryptocurrency has been here before, its 15-year history peppered with dramatic price increases and equally dizzying falls. Driving the gains: interest.

Markets expect central bank hikes to credit costs to approach a peak, and such a scenario is set to strengthen risks on assets such as bitcoin, six investors and analysts from crypto and traditional finance told Reuters.

“The macro narrative is number one,” said Noelle Acheson, an economist who has followed the crypto sector for seven years. “Bitcoin is not only a risky asset, it is arguably the most sensitive to monetary liquidity of all risky assets.”

Other factors are also at play, from turmoil in the banking sector to lingering hopes – still unfulfilled – that bitcoin could achieve widespread adoption as a form of payment.

Bitcoin ended its best week in four years on Sunday, gaining 45% in just 12 days.

As the collapse of US lenders Silicon Valley Bank and Signature Bank helped trigger Sunday’s takeover of 167-year-old Credit Suisse by rival UBS, claims that bitcoin is an asset immune to the risks of traditional finance have gained traction.

“It is quite narrow-minded to say that bitcoin is going to succeed because a bank failed,” said Usman Ahmad, CEO of Zodia Markets, the crypto exchange of the venture arm of Standard Chartered ( STAN.L ) and Hong Kong crypto firm BC Teknologigruppen.

“But confidence is almost a critical factor – confidence in the banking system has been damaged.”

Driving bitcoin’s gains has been its core user base of retail investors, analysts said. Institutional investors such as pension funds, which until now have been wary of the volatile and mostly unregulated bitcoin, are likely to remain skeptical of a long-term renaissance for the cryptocurrency, the interviews showed.

“Bitcoin’s recent bull run appears to be mainly supported by individual investors – ranging from retail to whales – as we’ve seen evidence of institutions exiting this rally,” said Zhong Yang Chan, head of research at crypto data firm CoinGecko.

In fact, bitcoin investment products, favored by larger investors, saw outflows of $113 million last week, according to digital asset manager CoinShares, which attributed the moves to a battle for liquidity amid turmoil in the banking sector.

DÉJÁ VU?

Also in the past, dramatic price fluctuations for bitcoin have been closely linked to changes in monetary policy globally.

As stimulus measures flooded the global financial system during the COVID-19 pandemic, domestic investors drove a sixfold increase in bitcoin between September 2020 and April 2021.

These moves, allied with growing interest in crypto from larger investors and companies, led crypto backers to promise that the chances of a bruising crash historically following a bitcoin rally were lower.

Yet as signs of ongoing inflation late into 2021 forced central banks and governments to scale back stimulus packages, bitcoin fell by more than half from a record high of $69,000 in just 75 days as rates began to rise.

In 2022, bitcoin fell over 65% as higher rates triggered the fall of a major crypto token, triggering the shutdown of major hedge funds and crypto lenders. It was further crushed by regulatory headaches and the dramatic fall of the FTX exchange.

The disastrous year was yet another reminder of bitcoin’s vulnerability to external shocks, despite its backers’ claims that it is a safe haven in times of political and economic stress.

To be sure, some investors say that the development of bitcoin’s inherent properties is now able to support its price. For example, Richard Galvin of crypto fund Digital Asset Capital Management cited software upgrades that have enabled a new type of non-fungible tokens on bitcoin.

Still, doubts remain for investors in traditional assets.

“I don’t know if people in old-fashioned currency are reconsidering it,” said Stephen Gallo, European head of currency strategy at BMO Capital Markets. “We are still struggling with bitcoin about the definition of a currency.”

Reporting by Tom Wilson, editing by Louise Heavens

Our standards: Thomson Reuters Trust Principles.