Bitcoin 2023 rally gathers steam as cryptocurrency tops $23,000

Bitcoin continued its rally on Monday as traders took news of yet another crypto bankruptcy and bet on a Federal Reserve “pivot” to cut interest rates.

The price of the No. 1 token briefly topped $23,100 on Monday, after touching $23,333.83 on Saturday for the first time since August 19, according to Coin Metrics. The jump brings bitcoin up nearly 39% since the beginning of January.

Ether, the second largest digital coin, rose as high as $1,664.78 on Saturday. It is the first time it has crossed $1,600 since November 7, 2022. It last traded at $1,637.40 apiece.

Bitcoin has started 2023 on a positive note, with investors hoping for a reversal of 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, such as stocks and digital tokens. Publicly traded technology stocks and private venture capital-backed start-ups took a particular beating, as investors sought protection in assets perceived to be safer, such as cash and bonds.

With inflation now showing signs of cooling in the US, some market participants are hopeful that central banks will begin to ease the pace of rate hikes, or even cut rates. Economists have previously told CNBC that they predict a rate cut could happen as soon as this year.

“Fed tightening appears to be easier and inflation less of a risk,” Charles Hayter, CEO of crypto data website CryptoCompare, said in an email to CNBC. “It is hoped that there will be more caution in rating increases globally.”

The Fed will probably keep interest rates high until further notice. However, some officials at the bank have recently called for a reduction in the size of quarterly rate hikes, wary of a slowdown in economic activity.

The world’s top digital currency, bitcoin, is “increasingly looking like it’s bottomed out,” according to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.

Bitcoin short sellers have been pressured by sudden upward movements in prices, according to Ayyar. Short selling is an investment strategy where traders borrow an asset and then sell it in the hope that it will fall in value.

A wipeout of the short positions triggered by the rising price of bitcoin has added “fuel to the fire,” Ayyar said, as short sellers are forced to cover their bets by buying back the borrowed bitcoin to shut them out.

Investors do not appear to have been greatly disturbed by the collapses of the top crypto companies, stemming from the fallout of digital currency exchange FTX’s insolvency in November.

Last week, the lending arm of New York-based crypto investment firm Genesis became the latest victim of the crypto crisis, seeking bankruptcy protection in a “mega” filing that listed total liabilities from $1.2 billion to $11 billion.

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

“However, it should be noted that the price of bitcoin itself is quite limited since FTX had none on its balance sheet.”

Bitcoin is still about 67% of its all-time high, despite the recent surge.

The latest crypto plunge is different from previous cycles, largely because of the role that leverage plays. Major crypto players became embroiled in risky lending practices, offering high returns that many investors now say were unsustainable.

This began in May with the collapse of terraUSD – or UST – an algorithmically stable coin that was supposed to be pegged one-to-one with the US dollar. The failure of UST brought terraUSD’s sister token luna and hit companies with exposure to both tokens.

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

Then came the November collapse of FTX, one of the world’s largest cryptocurrency exchanges. It was run by Sam Bankman-Fried, a leader who was often in the spotlight.

The fallout from FTX continues to ripple across the cryptocurrency industry. Roughly $2 trillion of 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.”

One analyst warned that technical indicators suggest there could be a 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, is diverging from the price’s upward movement and starting to slide down, which is not a good sign for the current price trend.”

“Bitcoin may test its August high and be supported at the $20k~$21k level, but with RSI’s divergence and a couple of big tech earnings ahead this week, it could be quite volatile,” Hagesawa said in a Monday note.

The latest price increase in bitcoin has nevertheless given some investors hope that the ice may begin to thaw.

Greenspan said bullish moments in bitcoin are typical for the cryptocurrency, as investors anticipate the next so-called “halving event” — a change in the bitcoin network that halves rewards to miners. It is seen by some investors as positive for the price of the token as it pushes supply.

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