Crypto is off to a good start in 2023. But can the rally continue?
Since the beginning of the year, bitcoinsThe price of has risen by 33% and etherprice of , 30%. The recovery has coincided with bullish movement in the stock market, including strong performances from riskier assets such as tech stocks.
“When stocks rallied in early January, you saw cryptocurrencies move with them,” says Mizuho analyst Ryan Coyne. “The broader mindset in the market was riskier than risk averse.”
But the cryptocurrency rally hasn't come close to offsetting the heavy losses investors witnessed in 2022. The industry grappled with significant interest rate hikes, which tend to weigh on financial asset prices, as well as erosion of confidence that seemed to reach a peak during the collapse from the FTX crypto exchange. Bitcoin and Ethereum prices remain low about 50% in the last year.
Crypto's struggles are likely not over. If the major currencies are to go higher in the coming months, experts say it will be necessary to overcome the imminent threats of regulationstill-high interest rates and the persistent concerns of investors about the safety of their money in exchanges.
Why is the cryptocurrency market recovering?
Traditionally, cryptocurrencies do better in low interest rate environments, and the Federal Reserve's rate hikes were partly responsible for the fall in cryptocurrency prices last year, says Michael Miller, an analyst at Morningstar.
High interest rates make it more expensive for businesses and consumers to borrow money, which can make buying speculative assets less attractive. Higher rates also increase the returns on other types of investments, which can make cryptocurrencies less attractive in comparison, Miller says.
The growing sentiment that rates will not rise much has helped fuel the cryptocurrency rally in 2023, it adds. While Federal Reserve Chairman Jerome Powell recently signaled that more rate hikes will likely be needed, the latest hike was much smaller than previous ones, giving investors hope that the central bank is moving closer to end of its adjustment cycle.
“We've seen some decent economic numbers, but also some signs that maybe the Federal Reserve will start to slow down the rate hikes,” Miller says. speculative asset classes.
Another element of the rally may simply be that some time has passed since the darkest days of 2022 for cryptocurrencies, and investors are regaining confidence as a result, Miller says.
“A lot of what pushed cryptocurrency markets lower in the first place was successive waves of some really serious bad news in terms of major players in the industry collapsing,” he adds. It is possible that as we move away from [those] negative events that part of the pressure is derived from the prices of cryptocurrencies".
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What's next for cryptocurrencies?
Cryptocurrency prices could go higher in 2023 if cryptocurrency companies can show they are in a better position and if the Federal Reserve stops raising interest rates, Miller says. But if those two things don't happen, or if we see more moves toward regulation by the US government, like a recent Campaign in betprices could go down.
Matt Hougan, chief investment officer at crypto index fund manager Bitwise Asset Management, makes a bullish case for 2023. He argues that we're seeing a “relief rally” after the 2022 bankruptcies. (In addition to the FTX collapse, lenders BlockFi, Celsius Network and Voyager Digital, as well as cryptocurrency hedge fund Three Arrows Capital, filed for bankruptcy last year). "fragmentation" – which could make cryptocurrencies more attractive as the year progresses.
“When we turned the corner towards 2023, I think people realized that cryptocurrencies weren't going away,” says Hougan. He adds that while regulatory pressure could lead to another volatile year with pullbacks in crypto markets, the 2022 slide may have gone too far and he predicts the market will recoup some of the losses to finish the year higher.
But crypto executives anticipate more lawsuits and investigations to come, The Wall Street Journal reports. Just this week, New York regulators told crypto firm Paxos to stop issuing the Binance-branded BUSD stablecoin, which is currently the seventh-largest cryptocurrency by market value.
On top of this, Coyne says that many investors are still on edge after the chaos of 2022, which limits the potential of cryptocurrencies for a really strong year. Some investors got burned in the last dip and are hesitant to get involved in crypto again, he adds.
Even if macroeconomic conditions become more favorable for cryptocurrencies, say inflation goes down and interest rates come to a halt, Coyne doesn't see cryptocurrency prices reaching the levels of the 2020 and 2021 “crazy” periods. And if rates continue to rise, 2023 may be another bad year for cryptocurrencies, he adds.
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Should you invest in cryptocurrencies now?
invest in crypto is inherently risky, and its future is uncertain, especially given recent regulatory concerns. If you are willing to invest, financial advisors They tend to recommend investing only a small percentage of your portfolio, like 2-5%. Common advice is not to invest more than you stand to lose.
Crypto investing is also not for those who cannot handle price volatility. The main ups and downs of cryptocurrency prices were evident last year when the bitcoin price in November it was more than 75% below the level of the previous year.
Cryptocurrencies “remain a fairly risky asset class with a lot of cautionary elements for buyers,” says Coyne.
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