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Why is bitcoin (BTC) rallying in January?

A number of factors are behind bitcoin’s New Year rise, according to analysts, including an increased probability of interest rates being lowered and purchases by large buyers known as “whales.”

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Bitcoin has begun 2023 on a positive note, with the price of the world’s largest digital token up roughly 26% since the start of January.

On Saturday, bitcoin’s price rose above $21,000 per coin for the first time since Nov. 7.

It’s still a far cry from the $68,990 record high bitcoin notched in Nov. 2021. But it has given market players cause for some optimism.

The month-to-date rally follows a grim 2022, which saw major insolvencies and scandals in the crypto industry, including the collapse of FTX, and a sharp pullback in the broader market linked to central bank actions.

Analysts say that a number of factors are behind bitcoin’s New Year rise, including an increased probability of interest rates being lowered, as well as purchases by large buyers known as “whales.”

New Year, new monetary policy?

Inflation is cooling down, and economic indicators suggest slowing U.S. economic activity. That’s made traders optimistic the Federal Reserve could reverse, or at least soften, its rate hiking strategy.

FTX's collapse is shaking crypto to its core. The pain may not be over

Last week, fresh U.S. inflation data showed a modest retreat, with the consumer price index decreasing 0.1% in December on a monthly basis, in line with Dow Jones estimates.

“Bitcoin looks to have recoupled with macro data as investors shrug off the FTX collapse,” James Butterfill, head of research at digital asset management firm CoinShares, told CNBC by email.

“The most important macro data investors are focussing on is the weak services PMI and the trending down of employment and wage data. This coupled with downwards trend in inflation has led to improving confidence, while it comes at a time when valuations for Bitcoin … are close to all time lows. The prospect of looser monetary policy off the back of weaker macro data and low valuations is what has led this rally.”

The Fed lifted borrowing rates seven times in 2022, forcing risky assets such as stocks — and tech stocks, in particular — into a tailspin. In December, the benchmark funds rate increased to 4.25%-4.50%, reaching its highest level since 2007.

Bitcoin has been caught up in the market drama around lending rates, as it is increasingly viewed by investors as a risky asset.

Backers previously talked up bitcoin’s potential as a “hedge” to buy in times of high inflation. But bitcoin failed to achieve that aim in 2022, instead slipping more than 60% as the U.S. and other major economies grappled with higher rates and living costs.

Yuya Hasegawa, crypto market analyst at Japanese crypto exchange Bitbank, said in a Jan. 13 note that this was “brewing a hope amongst market participants that the Fed will further slow down on the pace of rate hikes.”

The Fed is likely to keep interest rates high for the time being. However, some market players are…

Read More: Why is bitcoin (BTC) rallying in January?

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