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Cryptocurrency is off to a good start in 2023. But can the rally continue?
To date, the price of bitcoin has risen by about 33% and the price of ether by 30%. The rally coincided with a bullish move in the stock market. including outperforming riskier assets such as technology stocks.
“As stocks surged in early January, you also saw a movement in cryptocurrencies,” said Mizuho analyst Ryan Coyne. “Broader market sentiment has been more bearish than bearish.”
But the crypto rally has failed to offset the huge losses suffered by investors in 2022. The industry has faced significant increases in interest rates, which tend to affect the prices of financial assets, as well as a loss of confidence, which apparently peaked with the collapse of the FTX cryptocurrency exchange. Bitcoin and Ethereum prices have continued to decline by about 50% over the past year.
The battle of cryptocurrencies may not be over yet. Experts believe that if there is a major coin boom in the coming months, regulatory risks, still-high interest rates and ongoing concerns about the safety of their money on exchanges will need to be overcome.
Cryptocurrencies have traditionally performed best in low interest rate environments, and the Federal Reserve’s rate hikes are partly responsible for the decline in cryptocurrency prices over the past year, said Morningstar analyst Michael Miller.
High interest rates make borrowing more expensive for businesses and consumers, which can make buying speculative assets less attractive. Higher interest rates also increase returns on other types of investments, Miller said, which could make cryptocurrencies less attractive compared to them.
He adds that the growing perception that interest rates will not rise much has contributed to the crypto rally in 2023. While Federal Reserve Chairman Jerome Powell recently signaled that further interest rate hikes were likely, the latest hike was much smaller than previous ones, giving investors hope that the central bank is nearing the end of its tightening cycle.
“We have seen some good economic performance, but also some indications that the Federal Reserve may be starting to slow down the pace of rate hikes,” Miller said. "This has been a pretty strong start to the year for many speculative asset classes."
Another element of the rally could simply be that some time has passed since the darkest days of 2022 for crypto, Miller said, with investors gaining confidence as a result.
“A lot of what brought down the crypto markets in the first place was successive waves of very serious bad news related to the collapse of the main players in the industry,” he adds.
Cryptocurrency prices could rise in 2023 if crypto companies can prove they are in a better position and the Fed stops raising interest rates, Miller said. But if those two things don't happen, or if we see further regulatory action from the US government, such as the recent crackdown on strikes, prices could fall.
Matt Hogan, chief investment officer of Bitwise Asset Management, a cryptocurrency index fund manager, is optimistic about 2023. He says that after the 2022 bankruptcies, we will see a “relief rally.” (In addition to the collapse of FTX, crypto lenders BlockFi, Celsius Network and Voyager Digital, and crypto hedge fund Three Arrows Capital filed for bankruptcy last year.)
“When 2023 rolled around, I think people realized that crypto wasn’t going to disappear,” Heughan says. He adds that while pressure from regulators could lead to another year of unstable recovery in crypto markets, the crash of 2022 could still be a long way off and he predicts the market will bounce back and end the year in positive territory.
However, The Wall Street Journal reports that cryptocurrency executives expect more lawsuits and investigations. Just this week, regulators in New York asked crypto firm Paxos to stop issuing Binance-branded BUSD stablecoins, which is currently the seventh largest cryptocurrency by market value.
In addition, Coin says that many investors are still unsure about the chaos of 2022, which is limiting the cryptocurrency’s potential for a really strong year. He adds that some investors have been burned out by the recent crash and are hesitant to reinvest in cryptocurrencies.
Even if macroeconomic conditions become more favorable for cryptocurrencies, for example, inflation decreases and interest rates stop rising, Coyne does not think that cryptocurrency prices will reach the levels of the boom periods of 2020 and 2021. And if interest rates continue to rise, 2023 could be another bad year for cryptocurrencies.
Investing in cryptocurrencies is inherently risky and unreliable, especially given recent regulatory concerns. If you are inclined to invest, financial advisors usually recommend that you only invest a small percentage of your portfolio, say 2-5%. The general advice is not to invest more than you can afford to lose.
Cryptocurrency investing is also not for those who cannot handle price volatility. The massive drop in cryptocurrency prices was evident last year when the price of bitcoin fell over 75% year-to-date in November.
Cryptocurrency “remains a fairly risky asset class with many areas of concern for buyers,” Coyne said.
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