Why is the price of bitcoin rising and what factors influence it?

The price of bitcoin has increased by 82% since January, after plummeting in the latter months of last year.

Cryptocurrency made headlines in late 2022 when major online exchange FBX crashed, leaving investors out of pocket to the tune of billions of dollars. This caused the entire cryptocurrency market to tank, with bitcoin’s price falling below $16,000 in November.

However, in the months since, the price of the digital asset has rallied. The price of bitcoin breached $30,000 for the first time since June last year. So what could be behind the latest spike in the cryptocurrency market?

Interest rates could fall

One key reason behind bitcoin’s recent performance is likely to be that analysts expect the United States’ Federal Reserve to stop raising interest rates – and possibly begin lowering them – at some point in 2023. This is due to the economy stabilising after a turbulent period.

The Federal Reserve has increased interest rates nine times in a row in order to tackle rising inflation. This has made it more expensive to borrow money. It also lowered appetite for investment risk, as greater returns can be made from safer government assets.

Many investors may once again turn to the stock and cryptocurrency markets if interest rates come down.

Bitcoin is set to ‘halve’ in 2024

Bitcoin works by rewarding ‘miners’, who power the blockchain’s public ledger by verifying transactions using powerful computing hardware. The more verifications that a miner carries out, the greater the chance that they will receive a sum of bitcoin as a reward.

The number of bitcoin that will ever exist is fixed at 21 million. The amount that is paid to miners is halved every four years. This is next expected to occur in April 2024. This means that over time, the amount of bitcoin entering circulation falls, and the asset becomes increasingly scarce.

This can have the effect of pushing up the currency’s price. It may be already doing so due to investor speculation.

The collapse of traditional banks may have boosted bitcoin’s value

Due to its decentralised nature, cryptocurrency is regarded as an alternative to traditional stores of value and financial institutions.

Last month, Silicon Valley Bank (SVB) collapsed, marking the second biggest banking failure in American history. This happened due to a large number of clients needing to withdraw money simultaneously. The bank had invested its funds in longer-term assets that were struggling at the time. This led to it being forced to sell them at a loss.

One of Switzerland’s largest banks Credit Suisse also collapsed in the same month and was bought out by rival institution UBS.

Some analysts have suggested that these instances have highlighted weaknesses in traditional financial institutions. This could cause some investors to turn to decentralised alternatives.

It’s worth noting that bitcoin is an incredibly high-risk and volatile asset, and that the price of cryptocurrency is based purely on speculation.

If you are considering taking the risk and purchasing cryptocurrency, first make sure you understand what you are investing in, have a crypto investment strategy and have considered obtaining appropriate financial advice.