Here’s what drives it, according to Bernstein
by Arthur · February 16, 2023
A number of factors have come together recently to spark a major comeback for crypto. Bitcoin is up big in 2023, gaining 50%, while ether is up more than 40%, according to Coin Metrics. These gains come after a difficult 2022 for the crypto market. Last year, bitcoin fell 65%, and ether lost almost 68%. Those losses came as monetary policy tightened around the world and investors moved money into more traditional assets and away from riskier ones. Regulatory fears also increased after major debacles in some stablecoins and the FTX collapse. This year, however, the downtrodden crypto space seems to be getting some tailwind. Bernstein analyst Gautam Chhugani said recent regulatory actions may not be as bad as people think, helping push crypto prices up. “The regulatory actions were initially dubbed ‘Operation Choke point,’ which led to fears that crypto was being actively removed from the banking system, with an attack on stablecoins and custody rules,” he wrote in a note on Thursday. A stablecoin is a type of cryptocurrency that attempts to maintain a more stable price by tying its value to an underlying asset, such as gold or cash. The 2022 collapse of the algorithmic stablecoin terraUSD led to a massive decline in cryptocurrencies that saw billions of dollars in value wiped from the market. Recently, cryptocurrency firm Paxos said it would stop issuing stablecoin Binance USD , following instructions from the New York state financial regulator. BTC.CB= 1D mountain Bitcoin “As it stands now, the stablecoin action against BUSD/Paxos (private) was a more specific action against BUSD and cannot be extrapolated to all stablecoins such as USDC (private),” the analyst added to . “Overall, crypto moving forward remains more tightly controlled in the US, but it’s not a knock-out.” Chhugani also noted that while US regulations tend to dominate the news, elsewhere around the world, regulation and sentiment are more upbeat. “While US regulations appear to be tightening, regulatory murmurs from Hong Kong appear to be net positive, with expected easing of norms,” Chhugani said, adding that he “would not be surprised if the crypto market is led by Asia initially, until regulatory fears settle in the US.” Short coverage can also help jump in cryptocurrencies. Short covering occurs when a short seller buys back shares to close an open short position – returning borrowed shares – in an attempt to limit losses. This also further drives up the price of the underlying security. But there is more than just short covering – new buying is happening that is forcing prices up, the firm said. “While sharp price movements are affected by short covering, we believe that rising prices also force existing crypto investors to increase their exposure for each big move,” Chhugani wrote. He added, “Crypto liquid funds we’re talking to have had fairly conservative levels of exposure. While new capital may have been slow to enter the space, there is still sufficient capital undeployed in the ecosystem of crypto funds, which largely has remained risk-off so far.” — CNBC’s Michael Bloom contributed to this report.
