Bitcoin has made a 'phenomenal' comeback as it shakes off the crypto crisis, but a stubbornly strong economy puts the rally at risk

  • Bitcoin is having a “phenomenal” start to the year, up almost 50% after tanking in 2022.
  • The cryptocurrency has shaken off jitters sparked by high-profile failures like FTX’s implosion.
  • But investors’ growing acceptance of further US interest-rate hikes ahead stand to dent its rally. 

Bitcoin has been moving from strength to strength this year after a nightmarish 2022, but the gathering gloom about the chance of more US interest-rate hikes is putting the rally at risk.

The world’s biggest cryptocurrency by market value has shaken off the shock of last year’s high-profile crypto bankruptcies, including Three Arrows Capital and FTX, which shook confidence in the sector.

“It has been a phenomenal start to 2023 for bitcoin,” OANDA analyst Craig Erlam told Insider.

The token’s price has risen about 48% so far this year to $24,012, according to CoinMarketCap data at last check Wednesday, coming up on about halfway to its March 2022 high of $47,152. It has recouped 25% of last year’s losses in just seven weeks.

It plunged 64% in 2022 thanks to high interest rates, recession fears, as well as the fallout from the concerns that the insolvency and other financial problems faced by the likes of FTX would spread throughout the crypto world.

While the year-to-date rally seems to be driven by increased investor appetite for risk assets as inflation cools, it is not the only factor, according to Erlam.  

“The bitcoin rebound has been particularly extraordinary, and the very thing that caused it so much trouble towards the end of 2022 may be driving the strong rebound now,” he said.

“The thing I’m referring to at the back end of the year is the FTX collapse and the prospect of contagion/revealing of other bad actors that was not nearly as bad as feared,” he added. 

FTX’s implosion massively jolted crypto markets last year, triggering a wave of bankruptcies among companies that were tied to the exchange. It’s also sparked a crackdown on the industry as regulators seek to protect consumers from further financial harm. 

Ultimately, both crypto crashes and tighter regulations pave the way for a healthier industry moving forward, experts have argued. MicroStrategy founder and bitcoin bull Michael Saylor suggested FTX’s meltdown had a silver lining, because it’s flushed out bad actors and is helping the crypto world “grow up.” 

Just this month, the Securities and Exchange Commission charged crypto firms Genesis, Gemini and Kraken for the sale of unregistered securities. 

Erlam suggests such events have come as little surprise to crypto investors and have not deterred them from piling into bitcoin. 

“So not only has bitcoin bounced back, it’s done so fiercely and many will now be questioning whether the worst is behind it,” Erlam said. 

Pain ahead

But it’s not all rosy for crypto this year. According to Fawad Razaqzada, a market analyst at City Index, concerns that the global economy is be getting too hot could spell pain for bitcoin ahead. 

The US economy, for one, is a bit too strong for some investors’ liking, suggesting the Federal Reserve’s aggressive interest-rate hikes have not had the dampening effect policymakers are seeking.

That has weighed on crypto prices, as investors become increasingly convinced that interest rates will stay higher for longer. Bitcoin has moved about 2.6% lower in the last 24 hours on Wednesday, though it is still up about 8.5% over the past seven days. 

Inflation has been slowing from the 40-year high of 9.1% annualized rate reached last year, but is still way above the Fed’s 2% target, coming in at 6.4% in January. Meanwhile, retail sales and payrolls have risen, and unemployment is falling.

That could call for further interest rate hikes by the US central bank. Goldman Sachs sees the Fed making another three increases by the summer. It has already taken its target rate from almost zero to up to 4.75% within the past year.

Higher interest rates don’t typically bode well cryptocurrencies, because investors could be attracted by the more secure returns offered by lower-risk assets. 

With further rate hikes expected to weigh on the US economy, it’s set off concerns that the Fed will tip the US into recession.

“If concerns about growth intensify, then crypto assets might struggle to sustain this recovery,” Razaqzada told Insider.