Bitcoin’s Dramatic Comeback: Resurrection or Dead Cat Bounce?

In the past year, one cryptocurrency firm after another has gone bust, culminating in the grand implosion of the FTX exchange. The crypto vortex also contributed to some of the recent banking failures.

The prices of cryptocurrencies shot up in 2021, probably fueled by pandemic stimulus money sloshing around in the bank accounts of restless 20- and 30-somethings. All this came crashing back to earth in 2022, giving ample scope for skeptics to say, “I told you this was all foolishness.” Last rites were said, and crypto was left for dead.

But wait… in 2023, when no one was looking, the lid of the crypto coffin started to rattle, a bony hand reached out, and…crypto is back!!

Well, sort of. Here is a five-year chart of Bitcoin from Seeking Alpha, in U.S. dollars:

And here is the past six months:

We can see that Bitcoin took its final big leg down in November, 2022, with the FTX collapse. Its price stayed fairly plateaued down there (with heavy trading volume) until January. Since then, it has nearly doubled.

What has triggered this rise in 2023? Observers such as Michael Grothaus at Fast Company suggests some four factors:

( a ) A shift to “risk-on” with the prospect of the Fed easing off with interest rate hikes this year.

( b ) A flight to alternative assets in the wake of the turbulence in the banking sector. Also, since the total amount of bitcoin is programmed to never increase over a certain number, Bitcoin should be a hedge against inflation. (Many observers believe that the Fed will live with 3-4 % inflation indefinitely, to help inflate away the gigantic debt that the federal government incurred with pandemic relief).

( c ) Buying of Bitcoin by traders who were short, and now need to cover their positions.

( d ) The usual rise in Bitcoin values as a bitcoin “halving” event is on the horizon. (About every four years, with the next time scheduled for May 2024, the rewards for mining new bitcoins drops by 50%).

Will the rise in Bitcoin prices continue? Is this truly a resurrection from the dead, or just a “dead cat bounce”? [1] Nobody knows. But this latest, sustained rally seems to have helped it recover some luster of legitimacy as an asset class. Here is a list of some popular crypto exchanges that are still in operation.

My personal take: I hold a sliver of the Bitcoin fund GBTC, just to have some skin in the game. I have been too lazy to learn about and activate an actual crypto wallet. I think Bitcoin in particular is an intriguing entity. Many other cryptos at some level depend on some centralized administration, but Bitcoin embodies the ideal of a decentralized, power-to-the-people form of something like money.

[1] From Wikipedia: In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock.  Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline. This may also be known as a “sucker rally”.

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