Crypto beat other assets in the first quarter. It is still on shaky ground.

Bitcoin rose 72% to $28,440 between the end of the year and Friday afternoon, while Ether, the second-largest token, rose 53% to $1,827. The total market capitalization of all cryptos rose 49% in the first quarter to $1.19 trillion, according to CoinMarketCap.com.

A number of factors helped drive the performance. Crypto ended 2022 in one of the worst funks in its history, as the industry reeled from the failures of several major firms culminating in the implosion of the FTX exchange amid fraud allegations.

The change in sentiment began in January, when a modest inflation report gave investors in all risky asset classes hope that the Federal Reserve could ease rate hikes.

In March, the tokens rose again when three banks failed, which some token supporters argued provided evidence for Bitcoin’s use as a “safe haven” from the traditional financial system. That happened despite two of the three banks — Silvergate Capital and Signature Bank — having close crypto ties.

Despite the token’s recent success — with some analysts saying it could be a new bull market — there are reasons for caution.

First, even as prices rise, investors continue to pull money from major exchanges like Coinbase Global

(ticker: COIN) and Binance, BofA Global Research analysts said in a report Friday. Investors pulled more Bitcoin out of exchanges this past week than any other week of the year. That’s usually a positive sign for prices, as it means investors aren’t planning to sell anytime soon.

But more tellingly, it was also the second-biggest week of outflows for so-called stablecoins, which investors often use to buy other tokens “indicating that investors are continuing to move to the sidelines,” the analysts said. Over the past 11 weeks, investors have pulled $14.2 billion in such coins from exchanges.

In fact, Bitcoin has been rising in price for much of the past year, even as liquidity has been drained from the market and trading volume has fallen, indicating that it may not take much bad news to send the tokens lower. The market’s liquidity problems have only worsened since Silvergate and Signature said they would liquidate. Both banks operated internal payment networks widely used by exchanges, market makers and investors, and without them the token market has faced wider bid-ask spreads and other costs as investors seek alternatives.

Investors are also on edge as government enforcers look to crack down on Coinbase, Binance and other key players in the industry. Coinbase revealed in March that it had received a warning from Securities and Exchange Commission staff that it could be sued for securities violations, while the Commodity Futures Trading Commission sued Binance, accusing it of violating federal law. Meanwhile, some crypto firms have said they are having trouble finding basic banking services.

Token prices can be difficult to predict in the short term, but this rally is built on shaky ground.

Write to Joe Light at [email protected]