In the midst of a dark winter at the beginning of the year, bitcoin was in bad shape after a 2022 marked by falling cryptocurrency prices, corporate scandals, and bankruptcies.

In fewer than three months, bitcoin has regained its luster. It has outperformed other significant assets this year with gains of more than 70%, and on Wednesday, it was trading close to its highest level in nine months.

The first and largest cryptocurrency has been through this before; over its 15-year history, it has experienced both dizzying price increases and drops. Interest rates are driving the increases.

According to six investors and analysts from the crypto and traditional finance industries who spoke to Reuters, markets anticipate that central bank increases in the cost of credit are reaching their peak, which is expected to support risky assets like bitcoin.

“The macro narrative is the number one,” said Noelle Acheson, an economist who has tracked the crypto sector for seven years. “Bitcoin is not just a risk asset, it is arguably the most sensitive to monetary liquidity out of all of the risk assets.”

Other factors are also in play, such as the banking industry’s unrest and persistent but unfulfilled hopes that bitcoin will become a widely accepted form of payment.

On Sunday, Bitcoin recorded its best week in four years and has since increased by 45% in just 12 days.

Claims that bitcoin is an asset immune to risks in traditional finance have gained traction as the failure of American lenders Silicon Valley Bank and Signature Bank helped to trigger the takeover of 167-year-old Credit Suisse by rival UBS on Sunday.

“It’s rather narrow-minded to say that bitcoin is going to succeed because a bank failed,” said Usman Ahmad, CEO of Zodia Markets, the crypto exchange of the venture arm of Standard Chartered and Hong Kong crypto firm BC Technology Group.

“But confidence is almost a critical factor – confidence in the banking system has been damaged.”

Bitcoin’s core user base of retail investors has been fueling its growth, according to analysts. The interviews revealed that institutional investors, like pension funds, are likely to continue to be skeptical of a long-lasting renaissance for the cryptocurrency. These investors have previously been wary of the unstable and largely unregulated bitcoin.

“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 CoinGecko.

According to digital asset manager CoinShares, which attributes the movements to a scramble for liquidity during the chaos in the banking sector, bitcoin investment products, which are preferred by larger investors, did indeed experience outflows of $113 million last week.

Dramatic price fluctuations for bitcoin have previously been closely correlated with changes in monetary policy around the world.

The COVID-19 pandemic flooded the world’s financial system with stimulus measures, and at-home investors fueled a six-fold increase in bitcoin prices between September 2020 and April 2021.

Supporters of cryptocurrency declared that the likelihood of a brutal crash, which has historically occurred after bitcoin rallies, was reduced as a result of these actions and the growing interest in cryptocurrency from larger investors and businesses.

However, as rates started to rise in late 2021 and signs of rogue inflation forced governments and central banks to cut back on stimulus programs, bitcoin fell more than 50% from its all-time high of $69,000 in just 75 days.

The fall of a significant crypto token in 2022, brought on by higher interest rates, caused the closure of significant hedge funds and crypto lenders, and a drop in bitcoin of over 65%. Regulatory issues and the abrupt collapse of the FTX exchange further battered it.

Despite the claims of its supporters that bitcoin is a safe haven asset in times of political and economic stress, the disastrous year served as another reminder of its susceptibility to outside shocks.

Undoubtedly, some investors claim that changes to bitcoin’s fundamental qualities can now sustain its price. A new breed of non-fungible tokens on bitcoin have been made possible by software upgrades, according to Richard Galvin of the cryptocurrency fund Digital Asset Capital Management.

There are still uncertainties for investors in conventional assets.

“I don’t know if old-school currency people are reassessing it,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. “We are still struggling with bitcoin on the definition of a currency.”

(Adapted from Reuters.com)

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