After a difficult year in 2022, investors are approaching cryptocurrencies in 2023 with apprehension. Bitcoin is particularly affected by this cautious approach.
On Monday, 23rd January 2023, Bitcoin continued to rise as traders brushed off news of another cryptocurrency bankruptcy and wagered on the possibility of the Federal Reserve shifting towards lowering interest rates.
According to Coin Metrics, the No. 1 token surged to a price of over $23,100 on Monday, having previously hit $23,333.83 on Saturday for the first time since August 19. This rise has brought bitcoin’s value up by nearly 39% since the beginning of January.
On Saturday, Ether, the second-largest cryptocurrency, surged to a peak of $1,664.78, surpassing the $1,600 threshold for the first time since November 7, 2022. As of the latest trading session, Ether was priced at $1,637.40.
Investors are optimistic about Bitcoin’s start to 2023, anticipating a turnaround from the monetary restrictions that unsettled the market in the previous year.
In 2022, the Federal Reserve and other central banks surprised investors of risky assets like stocks and digital tokens by reducing interest rates. This caused publicly-listed tech stocks and privately-backed start-ups to suffer, as investors opted for safer assets like cash and bonds.
As the U.S. sees a decline in inflation, there is hope among some market participants that central banks may begin to slow down the pace of rate hikes or even reduce rates. Economists speculate that the Federal Reserve may implement a rate cut sometime this year.
According to Charles Hayter, the CEO of crypto data site CryptoCompare, the tightening measures by the Federal Reserve appear to be less severe and inflation is seen as less risky. He believes that there is a possibility for a more cautious approach to rate hikes worldwide.
While the Federal Reserve is expected to maintain high interest rates, a few of its officials have suggested decreasing the frequency of quarterly rate hikes due to concerns about a potential economic slowdown.
Vijay Ayyar, who serves as the Vice President of Corporate Development and International at crypto exchange Luno, believes that Bitcoin has reached its lowest point and is showing signs of improvement.
Ayyar reports that the prices of Bitcoin have surged unexpectedly, causing difficulties for those who engaged in short selling, an investment technique in which traders borrow an asset and sell it with the expectation that it will decrease in value.
According to Ayyar, the surge in bitcoin’s price has compelled short sellers to repurchase the borrowed bitcoin, leading to the elimination of their short positions and further contributing to the upward momentum.
What collapse in the cryptocurrency market?
The collapses of leading cryptocurrency companies, resulting from the insolvency of digital currency exchange FTX in November, do not appear to have caused significant concern among investors.
The lending division of Genesis, a crypto investment firm based in New York, filed for bankruptcy protection last week, joining the list of victims in the ongoing crypto crisis. The filing was extensive and indicated liabilities that could range from $1.2 billion to $11 billion.
Mati Greenspan, CEO and founder of Quantum Economics, a crypto investment advisory firm, stated to CNBC that the effects of the Genesis incident have already been factored into the market, while FTX has caused notable effects on several risky assets, investors and market sentiment.
Despite its recent surge, Bitcoin remains at about 67% below its all-time high.
The recent drop in cryptocurrencies distinguishes itself from previous cycles, primarily because of the impact of leverage. Prominent players in the crypto market involved themselves in precarious lending strategies, promising high returns that several investors now consider as unfeasible.
The series of events began in May when terraUSD, an algorithmic stablecoin intended to be equivalent to the U.S. dollar at a one-to-one ratio, experienced a collapse. The downfall of UST resulted in the decline of luna, the sister token of terraUSD, and negatively impacted businesses that had investments in both tokens.
Due to its investment in terraUSD, a stablecoin, Three Arrows Capital, a hedge fund with optimistic perspectives on cryptocurrency, suffered a significant loss and went into liquidation.
Following that was the downfall of FTX in November, which was among the biggest cryptocurrency exchanges globally, led by the frequently highlighted executive, Sam Bankman-Fried.
The cryptocurrency industry is still feeling the effects of FTX, with the overall crypto market losing around $2 trillion in value since the peak of the crypto boom in November 2021, leading to a significant downturn referred to as “crypto winter.”
Crypto is being severely impacted by the collapse of FTX, and the repercussions may continue.
An analyst has warned that technical indicators indicate a potential decline in the recent surge of the token.
According to Yuya Hasegawa, a crypto market analyst at Bitbank, a Japanese bitcoin exchange, bitcoin’s trend indicators suggest a strong upward trend. However, its relative strength indicator (RSI) is showing a divergence from the price’s upward movement and starting to decline, which is not a favorable sign for the current price trend.
According to Hagesawa’s note on Monday, Bitcoin may be able to reach its August high and find support at the $20k~$21k level. However, due to the RSI’s divergence and upcoming big tech earnings this week, it could become unstable.
Despite recent fluctuations, the increase in Bitcoin’s value has given some investors reason to believe that things may be starting to improve.
As per Greenspan there is nothing new about having an upward moment in Bitcoin. Instead, it is more or less a characteristic development that happens time and again. Another characteristic development associated with the Bitcoin is the halving event. When such an event takes place, the prices forwarded by Bitcoin to miners are halved.
But when we consider this from the perspective of the token’s price, the development is viewed as positive because the supply shrinks.
For the next halving, a timeline amid March and May 2024 is being anticipated.
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