Why bitcoin is up 40% in January despite the carnage in the crypto industry

by Arthur · February 18, 2023

Welcome back to the Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Bitcoin has had a stellar start to the year, rising nearly 40% so far, even though crypto lender Genesis filed for bankruptcy last week, just months after digital asset exchange FTX imploded in November. In this installment, I’ll break down what’s driving the biggest cryptocurrency rally.

Find me on Twitter at @FrancesYue_ to share some thoughts about crypto, this newsletter, or your personal stories with digital assets.

Why rally?

It’s not just crypto — most markets tend to perform well in January, as fund managers rush to deploy money at the start of a year, according to Ivan Ivanchenko, managing partner at Phinom Digital. In fact, most risk assets have risen so far this year, with the tech-heavy Nasdaq Composite up 8.8%, according to FactSet data.

Meanwhile, bitcoin was heavily shorted in November and December after FTX collapsed. As the cryptocurrency rose unexpectedly in January, some short sellers were forced to close their positions and buy bitcoin, pushing the crypto price even higher.

Bitcoin’s growth also comes as investor confidence picked up, noted Luuk Strijers, chief commercial officer at crypto derivatives exchange Deribit.

After FTX’s implosion in November, the number of open contracts for bitcoin futures and options on Deribit reached the highest level in history, indicating a high level of activity, Strijers noted. “It’s because people anticipated the worst that requires them to hedge their holdings to protect more downside,” Strijers told Distributed Ledger in an interview.

The fear and panic in the crypto market may ease a bit in January, with more signals in the derivatives market suggesting a comeback of institutional interest. The spot price of bitcoin is lower than futures prices, showing traders believe bitcoin’s price will rise, according to data from several exchanges.

In addition, there are more call options being traded in the market than put options, which signals an increase in bullish sentiment, Strijers noted. Call options allow traders to buy an asset at a predetermined price, while put options allow traders to sell an asset at a predetermined price.

What will be next?

Despite the recent rally, Phinom’s Ivanchenko expects further downside for bitcoin, which could fall below the previous low of $15,480, Ivanchenko said. “I prefer to think that the market right now has more risk than opportunity,” Ivanchenko said. “We don’t know the weakness of certain links.”

The macroeconomic environment remains challenging, with inflation still high and a possible recession looming at least in the US. It’s also unclear how Genesis’ bankruptcy could spill over to other companies, including its parent company Digital Currency Group and sister company Grayscale Investments, which owns the world’s largest bitcoin fund GBTC, Ivanchenko noted.

Read: Jeremy Grantham says the “easiest stage” of the stock market bubble is over. Here’s the next one.

Meanwhile, after several major crypto companies collapsed last year, “regulators can easily push the market to new lows,” Ivanchenko said.

Deribits Strijers has a different view. He expects the rally to continue with a market in a “recovery mode.”

The impact of the implosions of FTX and Genesis on most major crypto companies is already known and priced in, Strijers noted. “I think people realize that, and the Genesis problem, while bad and unsettled, is manageable,” Strijers said.

Tesla’s crypto holdings

Tesla did not buy or sell any bitcoins in the fourth quarter of 2022, although the largest cryptocurrency fell to a two-year low of $15,480 in November, after FTX filed for bankruptcy. Tesla invested $1.5 billion in bitcoin in early 2021, when the crypto was trading above $30,000.

Still, the electric car maker posted a loss of $34 million in the fourth quarter, and recorded the value of its digital assets at $184 million on December 31, down from $218 million on September 30.

Crypto in a flash

Bitcoin prices rose 10% over the past week, trading at around $23,027 on Thursday, according to CoinDesk data. Ether

ETHUSD

rose 5% over the same stretch to around $1,601, CoinDesk data shows.

Biggest winners	Price	%7 day return
Aptos	$18.32	139.5
Phantom	$0.49	63
Axie Infinity	$11.64	44.6
BTS	$3.01	42.6
eCash	$0.00004	42.5
		Source: CoinGecko as of January 26

Biggest losers	Price	%7-day return
Flares	$0.04	-8.6
Tokenize Xchange	$6.67	-2.2
Pax Dollar	$1	-0.4
Tether	$1	-0.3
TrueUSD	$1	-0.2
		Source: CoinGecko as of January 26