Bitcoin, ether (Ethereum)… Cryptocurrencies have been on the boil for a few weeks. We judge. Since the end of 2022, the queen of cryptocurrencies has already gained a whopping 37%, while ether, its main challenger, has not been outdone, with an equally enviable gain of 30%. Very rapid “rallies”, which contrast with the long descent into hell that began in the autumn of 2021 and the lethargy of the last months of 2022, in a context of depressed investors, burned by repeated scandals (Earth – Moon, bankruptcy of FTX…).
The magnitude and speed of the price increase in such a short period (less than 4 weeks) is astonishing. In essence, the sharp recovery of cryptocurrencies is explained by the increase of hopes on the trajectory of inflation in the United States, which is expected to continue to decline, many economists (and investors) hope. Indeed, a significant drop in inflation in the US would encourage the US Federal Reserve (Fed, US central bank) to become less strict in terms of monetary policy.
Bitcoin, ether (Ethereum)… cryptocurrencies raise their heads: the Stock Exchange Council
It could then stop aggressively raising its benchmark rate, or even end up lowering it. A rosy scenario that would probably weigh on long-term rates… and therefore support bitcoin and other cryptocurrencies. Indeed, these virtual currencies pay no income, they would likely benefit from favorable arbitration over an alternative investment such as a government bond.
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More generally, bitcoin is also benefiting from the marked return to risk appetite of investors, who have been favoring risky assets for several months. A phenomenon that since the end of September 2022 has mainly concerned shares. And cryptocurrencies seem to have been part of it for a few weeks. Recall that bitcoin is historically closely correlated to the Nasdaq, the American stock index rich in technology and growth stocks. However, the latter has clearly strengthened since last December’s low.
While the trajectory of cryptocurrencies is now more favourable, should we jump on the bandwagon? From Capital’s point of view (as well as its investment letter and Bourse premium newsletter Momentum and its 21 million newsletter dedicated to cryptocurrencies), even if certain signs are encouraging and bode well, a certain prudence is still a bet.
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Indeed, on the one hand, cryptocurrencies currently appear extremely overbought, according to some indicators of thetechnical analysis, (market analysis based on the study of past price trends and a whole battery of mathematical indicators). Therefore, they look vulnerable in the short term and could soon enter a downward price correction phase.
More fundamentally, the decline in US inflation is likely to be less marked than expected this year, due to still high inflation in wages and services, hopes for the Chinese economy linked to the reopening of its economy and a possible increase in energy prices, among others. In this scenario, the Fed could remain tight on rates longer than expected. A scenario that would be unfavorable for bitcoin and, more generally, for all risky assets.
Additionally, Vincent Boy, a market analyst at IG France, notes that cryptocurrencies will face a number of potential pitfalls this year. New scandals and bankruptcies cannot be ruled out, while the FTX scandal undermined the confidence of many investors, a priori long-term for the victims.
In this regard, Genesis recently filed for bankruptcy, while “possible liquidity problems could hit Binance, even if the latter seems a priori more solid than FTX”, according to Vincent Boy, who also notes that “strong hands” – that is, say the large holders of bitcoin – sell it to the “weak hands” (the more modest and less informed investors). A phenomenon that justifies, here too, a certain caution on the prospects of bitcoin, ether and other cryptocurrencies.