Why crypto prices are rising and what’s next for investors

Crypto is off to a strong start in 2023. But can the rally continue?

Since the beginning of the year, bitcoin’s price has jumped around 33% and ether’s price, 30%. The rise has coincided with upward movements in the stock market, including strong results from riskier assets such as technology stocks.

“When stocks rose in early January, you saw crypto move with it,” says Mizuho analyst Ryan Coyne. “The broader mindset in the market was more risk averse than risk averse.”

But the crypto rally has not come close to making up for the heavy losses investors witnessed in 2022. The industry has dealt with significant interest rate hikes – which tend to weigh on financial asset prices – as well as an erosion of confidence that looked to reach a peak during the collapse of the crypto exchange FTX. Bitcoin and ether prices are both still down around 50% in the last year.

Crypto’s struggles are likely not over. If major coins are going to move higher in the months ahead, experts say it will take overcoming looming threats of regulation, continued high interest rates and lingering investor concerns about the safety of their money on exchanges.

Why the crypto market is increasing

Traditionally, cryptos do better in low-interest rate environments, and the Federal Reserve’s rate hikes were partly responsible for the crash in crypto prices last year, said Michael Miller, a Morningstar analyst.

High interest rates make it more expensive for businesses and consumers to borrow money, which can make the purchase of speculative assets less attractive. Higher rates also increase returns on other types of investments, which can make crypto less attractive by comparison, Miller says.

The growing sense that prices won’t move much higher has helped drive the crypto rally in 2023, he adds. While Federal Reserve Chairman Jerome Powell recently signaled that more rate hikes are likely to be needed, the latest increase was much smaller than previous ones, giving investors hope that the central bank may be nearing the end of its tightening cycle.

“We’ve seen some decent economic numbers, but also some signs that maybe the Federal Reserve will start to slow the pace of rate hikes,” Miller says. “That has led to a pretty strong start to the year for a lot of speculative asset classes.”

Another element of the rally could simply be that some time has passed since the darkest days of 2022 for crypto, and investors are regaining confidence as a result, Miller says.

“A lot of what pushed the cryptocurrency markets down initially was consecutive waves of some really serious bad news in terms of big players in the industry collapsing,” he adds. It is possible when we move away from [those] negative events that some of the pressure comes off cryptocurrency prices.”

What’s next for crypto?

Crypto prices could move higher in 2023 if crypto companies can show they are on a better footing and if the Fed stops raising interest rates, says Miller. But if those two things don’t happen, or if we see more moves toward regulation by the U.S. government, like a recent move against efforts, prices could drop.

Matt Hougan, chief investment officer at crypto index fund manager Bitwise Asset Management, makes a bullish case for 2023. He argues that we see a “relief rally” after the bankruptcies in 2022. (In addition to FTX collapsing, crypto lenders BlockFi , Celsius Network and Voyager Digital, as well as crypto hedge fund Three Arrows Capital, filed for bankruptcy last year.) He also says technological improvements are reducing fees for ethereum transfers — citing a planned multi-phase upgrade called “sharding” — that could make crypto more attractive as the year goes on .

“When we turned the corner to 2023, I think people realized that crypto wasn’t going away,” Hougan says. He adds that while regulatory pressure could lead to another volatile year of setbacks in crypto markets, the 2022 crash may have gone too far, and he predicts the market will recoup some of its losses to end the year higher.

But crypto executives expect more lawsuits and investigations to come, The Wall Street Journal reports. Just this week, regulators in New York asked crypto firm Paxos to stop issuing Binance-branded stablecoin BUSD, which is currently the seventh largest cryptocurrency by market capitalization.

On top of this, Coyne says many investors are still jittery after the chaos of 2022, limiting crypto’s potential for a really strong year. Some investors got burned in the last crash and are hesitant to get involved in crypto again, he adds.

Even if macroeconomic conditions become more favorable for crypto—say, inflation falls and rate hikes stop—Coyne does not see crypto prices reaching the levels of the “mania” periods in 2020 and 2021. And if prices continue to rise, it’s possible that 2023 could be another bad year for crypto, he adds.

Should you invest in crypto now?

Investing in crypto is inherently risky, and the future is uncertain – especially given recent regulatory concerns. If you are inclined to invest, financial advisors tend to recommend investing only a small percentage of your portfolio, say 2-5%. Common advice is not to invest more than you can lose.

Crypto investing is also not for those who cannot handle price volatility. The big ups and downs of crypto prices were proven last year when in November the price of bitcoin fell more than 75% from the level of the previous year.

Crypto “still remains a pretty serious, risky asset class with a lot of buyer beware,” says Coyne.