Why is bitcoin (BTC) rallying in January?

Bitcoin has started 2023 on a positive note, with the price of the world’s largest digital token up 26% since the beginning of January.

On Saturday, the price of bitcoin rose above $21,000 per coin for the first time since November 7.

It is still far from the record $68,990 Bitcoin high notched in November 2021. But it has given market players cause for some optimism.

The month-to-date rally follows a dismal 2022, which saw major bankruptcies and scandals in the crypto industry, including the collapse of FTX, and a sharp pullback in the broader market linked to central bank actions.

Analysts say that several factors are behind bitcoin’s New Year’s rise, including the possibility of increased interest rates being lowered, as well as purchases by large buyers known as “whales.”

Inflation is down, and economic indicators suggest slowing US economic activity. That made traders optimistic that the Federal Reserve could reverse, or at least moderate, its rate hike strategy.

Last week, fresh US inflation data showed a modest retreat, with the consumer price index falling 0.1% in December on a monthly basis, in line with Dow Jones estimates.

“Bitcoin appears to have recoupled with macro data as investors shrug off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC via email.

“The most important macro data investors are focused on is the weak service PMI and the downward trend in employment and wage data. This coupled with the downward trend in inflation has led to an increase in confidence, while at a time when valuations for Bitcoin .. The outlook for monetary policy is more looseness off the back of weaker macro data and low valuations is driving this rally.

The Fed raised its borrowing rate seven times in 2022, forcing risky assets such as stocks – and technology stocks, in particular – into a tailspin. In December, the benchmark funds rate rose to 4.25%-4.50%, reaching the highest level since 2007.

Bitcoin has been caught up in market drama over credit ratings, as it is increasingly viewed by investors as a risky asset.

Backers previously talked about the potential rise of bitcoin as a “hedge” to buy in times of high inflation. But bitcoin failed to reach that goal in 2022, instead falling more than 60% as the US and other major economies struggled with higher rates and the cost of living.

Yuya Hasegawa, crypto market analyst at the Japanese crypto exchange Bitbank, said in a January 13 note that this is “brewing a hope among market participants that the Fed will be slower in the pace of rate increases.”

The Fed is likely to keep interest rates high for the time being. However, some market players are hopeful that central banks will start to reduce the rate of rate hikes, or even cut rates. Some economists predict a Fed rate cut could happen as soon as this year.

That is the risk of recession is also playing in the central bank’s mind.

Some two-thirds of chief economists surveyed by the World Economic Forum believe a global recession is likely in 2023, according to research released by Davos organizers on Monday.

The US dollar also weakened, with the greenback down 9% against currencies used by US trading partners over the past three months. The majority of bitcoin trades against the USD, making a weaker dollar better for bitcoin.

“We’re seeing the dollar put on top, lower inflation, lower interest rates – all of which point to a more risk-averse market over the next few months,” Vijay Ayyar, vice president of corporate and international development at crypto exchange Luno, told CNBC.

Bigger buyers of digital coins known as “whales” may be leading bitcoin’s latest rally, according to Kaiko.

The crypto data firm said in a series of tweets on Friday that trading volume has risen from an average of $700 on January 8 to $1,100 today on the Binance crypto exchange, indicating new confidence in the market by the pope.

The Pope is an investor who has kept a large stack of bitcoins. Some individuals, like MicroStrategy CEO Michael Saylor and Silicon Valley investor Tim Draper. Others are entities such as market makers, which act as intermediaries in trade between buyers and sellers.

Skeptics of the digital currency say that this makes the market vulnerable to manipulation by a select few investors with large stacks of tokens. The 97 richest bitcoin wallet addresses account for 14.15% of the total supply, according to fintech company River Financial.

In December, Carol Alexander, a professor at the University of Sussex, told CNBC that bitcoin could see a “managed bull market” in 2023 where bitcoin travels north of $30,000 in the first quarter, and up to $50,000 in the second half. His reasoning is that with trading volume evaporating, and the fear level in the market so high, the whales will then enter the market.

There are other factors at play, too.

Some bitcoin miners have been dumped as the price has dropped. Bitcoin miners, who use power-intensive machines to verify transactions and mint new tokens, have been squeezed by the slump in prices and rising energy costs.

It is historically a good sign for bitcoin, according to Ayyar.

The actor amassed a huge pile of digital currency, making him the biggest seller in the market. With miners releasing their holdings to pay off debt, that removes much of the remaining selling pressure on bitcoin.

More recently, however, bitcoin’s “hard” network has grown, meaning more computing power is deployed to release new tokens into circulation.

Mining difficulty hit a record 37.6 trillion on Sunday, according to BTC.com data, meaning that, on average, it takes 37.6 trillion hashes, or attempts, to find the correct bitcoin block and add it to the block.

“Bitcoin mining difficulty is a measure of how difficult it is to create the next block of transactions,” Marcus Sotiriou, a market analyst at digital asset brokerage GlobalBlock, told CNBC.

“Bitcoin mining difficulty fell 3.6% before the last update, after a winter storm drove some miners to shutdown. However, now miners seem to be back online, with new and more efficient machines.”

Meanwhile, events further down the crypto calendar could give traders cause for some New Year’s cheer. It’s still a year away, but the so-called bitcoin “halving” is an event that often causes excitement among crypto investors.

Halving, where bitcoin rewards for miners are cut in half, is seen by some investors as positive for the price of bitcoin as it reduces supply.

“There are signs this could be the start of a new cycle with Bitcoin, as it usually is about 15-18 months before the halving,” Ayyar told CNBC.

The next half is scheduled to take place between March and May 2024.

However, Ayyar warned, “At this point, we are in overbought territory with Bitcoin and therefore we can see a downside.” The price could fall if bitcoin closes below $18,000 in the next few days, he added.