What’s behind bitcoin’s latest surge?

At the turn of the year, bitcoin was in the grip of a bleak midwinter, down and out after a 2022 defined by tumbling crypto prices, bankruptcies and corporate scandals.

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Less than three months later, bitcoin’s got its mojo back. With gains of more than 70 percent so far this year, it has outpaced other major assets, and was on Wednesday trading near its highest in nine months.

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.

Markets expect that central bank hikes to the cost of credit are nearing their peak, and such a scenario is set to buoy risk-on assets such as bitcoin, six investors and analysts from crypto and traditional finance told Reuters.

“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 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.

Bitcoin closed its best week in four years on Sunday, and has gained 45 percent in just 12 days.

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

“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.”

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 skeptical of a long-lasting renaissance for the cryptocurrency, the interviews showed.

“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.

Indeed, bitcoin investment products, favored 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.

Deja vu?

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 2021.

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

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

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. It was further bruised by regulatory headaches and the dramatic fall of the FTX exchange.

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.

To be sure, some investors say developments to bitcoin’s intrinsic characteristics are now capable of supporting its price. Richard Galvin of crypto fund Digital Asset Capital Management, for instance, cited software upgrades that have enabled a new breed of non-fungible tokens on bitcoin.

Still, for investors in traditional assets, doubts remain.

“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.”

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