Analysis: What's behind bitcoin's latest surge?

OSL

22/03/2023 12:03

By Tom Wilson
       LONDON, March 22 (Reuters) - At the turn of the year,
bitcoin was in the grip of a bleak midwinter, down and out after
a 2022 defined by tumbling crypto prices, bankruptcies and
corporate scandals. 
    Less than three months later, bitcoin's got its mojo back.
With gains of more than 70% so far this year, it has outpaced
other major assets, and was on Wednesday trading near its
highest in nine months. 
    The original and biggest cryptocurrency  BTC=BTSP  has been
here before, its 15-year history peppered with dramatic price
increases and equally vertiginous drops. Fuelling the gains:
interest rates. 
    Markets expect that central bank hikes to the cost of credit
are nearing their peak, and such a scenario is set to buoy
risk-on assets such as bitcoin, six investors and analysts from
crypto and traditional finance told Reuters.
    "The macro narrative is the number one," said Noelle
Acheson, an economist who has tracked the crypto sector for
seven years. "Bitcoin is not just a risk asset, it is arguably
the most sensitive to monetary liquidity out of all of the risk
assets." 
    Other factors are at play, too, from turmoil in the banking
sector to enduring hopes - still unfulfilled - that bitcoin can
achieve wide usage as a form of payment. 
    Bitcoin closed its best week in four years on Sunday, and
has gained 45% in just 12 days. 
    As the collapse of U.S. lenders Silicon Valley Bank and
Signature Bank helped to triggered the takeover on Sunday of
167-year-old Credit Suisse by rival UBS, claims that bitcoin is
an asset immune to risks in traditional finance have gained
traction.
    "It's rather narrow-minded to say that bitcoin is going to
succeed because a bank failed," said Usman Ahmad, CEO of Zodia
Markets, the crypto exchange of the venture arm of Standard
Chartered  STAN.L  and Hong Kong crypto firm BC Technology
Group.
    "But confidence is almost a critical factor - confidence in
the banking system has been damaged." 
    Driving bitcoin's gains have been its core user base of
retail investors, analysts said. Institutional investors such as
pension funds, until now wary of the unstable and mostly
unregulated bitcoin, are likely to remain sceptical of a
long-lasting renaissance for the cryptocurrency, the interviews
showed. 
    "Bitcoin's recent bull run looks to be mainly supported by
individual investors – ranging from retail to whales – as we
have seen evidence of institutions exiting during this rally,"
said Zhong Yang Chan, head of research at crypto data firm
CoinGecko.
    Indeed, bitcoin investment products, favoured by larger
investors, saw outflows of $113 million last week, according to
digital asset manager CoinShares, which ascribed the moves to a
scramble for liquidity during chaos in the banking sector.  
            
    DEJA VU? 
    In the past, too, dramatic price swings for bitcoin have
been closely tied to shifts in monetary policy globally. 
    As stimulus measures flooded the global financial system
during the COVID-19 pandemic, stay-at-home investors fuelled a
six-fold rally for bitcoin between September 2020 and April
2021. 
    Those moves, allied with emerging interest in crypto from
larger investors and companies, led crypto backers to vow that
its chances of a bruising crash historically seen after bitcoin
rallies were lower.
    Yet as signs of runaway inflation late in 2021 forced
central banks and governments to curb stimulus packages, bitcoin
slumped by more than half from its record high of $69,000 in
just 75 days as rates began to rise. 
    In 2022, bitcoin plummeted over 65% as higher rates
triggered the fall of a major crypto token, precipitating the
closure of major hedge funds and crypto lenders. It was further
bruised by regulatory headaches and the dramatic fall of the FTX
exchange. 
    The disastrous year was another reminder of bitcoin's
vulnerability to external shocks, despite backers' claims it is
a safe haven asset in times of political and economic stress. 
    To be sure, some investors say developments to bitcoin's
intrinsic characteristics are now capable of supporting its
price. Richard Galvin of crypto fund Digital Asset Capital
Management, for instance, cited software upgrades that have
enabled a new breed of non-fungible tokens on bitcoin. 
    Still, for investors in traditional assets, doubts remain. 
    "I don't know if old-school currency people are reassessing
it," said Stephen Gallo, European head of FX strategy at BMO
Capital Markets. "We are still struggling with bitcoin on the
definition of a currency."

 (Reporting by Tom Wilson, Editing by Louise Heavens)
 ((T.Wilson@thomsonreuters.com; Twitter: @tomwilson1983; Reuters
Messaging: t.wilson.thomsonreuters.com@reuters.net))