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How did bitcoin get its cryptocurrency mojo back?

Just months ago, all forms of cryptocurrency appeared to be going up in flames, with bitcoin plunging from almost $50,000 at the start of 2022, to less than $17,000 when 2023 rolled around.

Bitcoin has since soared more than 60 percent and closed its best week in four years on Sunday, all in an era of mass layoffs in the tech sector and widespread anxiety about stability in the US banking sector.

The original and biggest cryptocurrency has been
here before, its 15-year history peppered with dramatic price
increases and equally vertiginous drops. Fuelling the gains:
interest rates.

But “as the economy heads towards a recession, the cryptoverse could look more attractive than equities,” wrote Edward Moya of Oanda in a research report. 

“It appears the downside risks are greater for the S&P 500 than they are for Bitcoin.”

If an investor on January 1 put $100 into bitcoin and $100 in an S&P 500 index fund, the bitcoin investment would have returned $60, compared with a $2 return on the S&P bet.

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.

READ MORE: Crypto and tech entanglement: Why everyone wants a piece of it

Immune to risks in traditional finance?

It’s also said that the collapse of Silicon Valley Bank and Signature Bank actually fuelled investments in bitcoin, indicating it may be immune to risks in traditional finance.

But Usman Ahmad, CEO of Zodia Markets told Reuters news agency that “it’s rather narrow-minded to say that bitcoin is going to
succeed because a bank failed.”

Instead, he believes that the critical factor is “confidence in
the banking system”, which “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

“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

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.

READ MORE: Crypto voters’: Can they influence US elections?

Dramatic swings

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

Those moves, allied with emerging interest in crypto from
larger investors and companies, led crypto backers to vow that
its chances of a crash were lower.

But in late 2021, inflation forced central banks and governments to curb stimulus packages and bitcoin slumped by more than half from its record high of $69,000 in just 75 days.

Then in 2022, bitcoin plummeted over 65 percent as higher rates
triggered the fall of a major crypto token, precipitating the
closure of major hedge funds and crypto lenders.

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.

Stephen Gallo, European head of FX strategy at BMO Capital Markets, said he doesn’t know if “old-school currency people” may be reassessing bitcoin, but they are “still struggling with bitcoin on the definition of a currency.”

All eyes now turn to the Federal Reserve, which meets this week and will make a decision on what to do about its benchmark interest rate.

“Bitcoin is Dr. Jekyll and Mr. Hyde when it comes to how it reacts to Fed rate expectations,” Moya said. “For most of last year, higher Treasury yields alongside rising Fed rate hike expectations spelled trouble for Bitcoin.

Fed rate cut bets are good news for cryptos, but a severe recession should prove troubling for all risky assets, including bitcoin.”

READ MORE: Digital asset heists: 2022 set to be biggest year for crypto hacks

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