Bitcoin surges as investors return to riskier assets

The price of bitcoin has surged nearly 30 per cent against the dollar in January, raising hopes among its faithful followers that the crypto market is emerging from the credit crisis that gripped it for much of last year.

The token, the most actively traded in the industry, has soared to more than $21,000 in the past week, breaking out of the tight range around $17,000 upon which it had settled following the collapse of the FTX crypto exchange in November.

The cryptocurrency has joined traditional financial assets such as stocks and bonds in rallying this year as investors become increasingly confident that the US Federal Reserve’s policy of rapid rates rises to combat inflation is beginning to moderate. Last week, the US consumer price index posted an inflation rate of 6.5 per cent in December, the sixth consecutive month of decline.

Although bitcoin enthusiasts argue the token can be a hedge against inflation, in the past year it has often fluctuated in line with shifts in consumer prices and interest rate expectations. The price began to tumble from its record high of nearly $70,000 in November 2021 when investors realised inflation was soaring.

“The overall rally across most asset classes year to date due to hopes of a ‘soft landing’ for the US economy is boosting sentiment in crypto,” said Nikolaos Panigirtzoglou, JPMorgan managing director focused on alternatives and digital assets.

He added that a weakening dollar also helped as it boosted the price of commodities such as gold, in turn helping to “reprice bitcoin as a substitute asset class”.

The optimism has spread to other crypto-related assets. Ether, the second most traded cryptocurrency, has risen 31 per cent this month to more than $1,575, according to Refinitiv data. The token is widely used as a building block for ambitious crypto projects because it allows programmers to code functions to automatically buy and sell assets.

Overall, the market value of the top 500 crypto tokens has risen back to $1tn from $830bn at the end of last year. It remains well off its November 2021 peak above $3.2tn, according to data from the Financial Times Digital Assets Dashboard.

“If inflation is now retreating, pressure on the Fed and other central banks to raise rates aggressively will be reduced, enabling a gentle shift back to more ‘risk-on’ strategies,” said Edmond Goh, head of trading at B2C2, a crypto market maker.

However, confidence in crypto markets remains fragile, in part because investors are wary of further sudden shocks after the collapse of Sam Bankman-Fried’s FTX.

“Some upside volatility was due to come eventually and does not mean that this move upwards will be sustainable,” said David Moreno Darocas, research lead at data provider CryptoCompare.

The fate of Genesis, one of the biggest lenders in the crypto market, in particular is uncertain. It halted customer withdrawals at its lending unit in November after FTX’s failure, blaming “unprecedented market turmoil” and owes its creditors more than $3bn. Its parent, crypto conglomerate Digital Currency Group, is trying to raise capital and avoid the bankruptcy of Genesis.

Other bellwether names, including crypto-focused bank Silvergate and crypto exchanges Coinbase and Crypto.com, said they would extensively cut headcount.

Research provider Kaiko noted that prices rallied last week in part because traders who were betting on bitcoin to fall were caught in a short squeeze, pushing prices higher.

It also pointed out that market liquidity, or the ability to easily buy and sell assets at prevailing market prices, remained very weak. Nearly 90 per cent of bitcoin trades are conducted using a stablecoin, tokens intended to track real-world currencies and maintain a steady value, it said.

Liquidity for both bitcoin and ether, as measured by the number of offers to buy and sell the tokens within 2 per cent of their price against the stablecoin Tether, had fallen by a fifth since early January to levels seen in the aftermath of the FTX fallout, Kaiko found.

“It is unclear why liquidity temporarily recovered but failed to stick around, especially over the past few days, which has seen the highest trade volumes since early November,” it said.

But some see another possible market shakeout as the last squeeze of a market that has been caught in a whirlwind since the sudden failure of the TerraUSD stablecoin last May.

“In my view, Genesis is the last domino to wobble since this sorry contagion crisis began with Terra months ago,” said Ian Taylor, board adviser at CryptoUK, a British crypto lobby group. “Even if Genesis files for bankruptcy, it’s kind of priced in.”