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2 Things to Know about Bitcoin: Before Investing

After trading below $17,000 since the FTX issue in November 2022, the flagship cryptocurrency Bitcoin showed signs of recovery on January 14, 2023, for the first time in two months, rising above $21,000. Despite being a far cry from the $68,000 price it crashed from, traders, investors, and enthusiasts were excited to see this little ray of sunshine.

2 Things to Know about Bitcoin: Before Investing

The entire crypto market saw a rise in value to $990 million, increasing by approximately 19% from $831 million in November 2022. Ademi, a crypto influencer and full-time trader, suggested that the rise could be due to a reduced supply of Bitcoin and Ethereum in the market. CNBC supported Ademi's perspective, reporting a significant buy-up of the cryptocurrency by large buyers known as "whales."

Here are two things you should know before you invest in crypto

Why is the crypto market on the rise?

After enduring a long crypto winter, Ademi finds the current price surge of Bitcoin to be a breath of fresh air. Although she's hopeful that the prices will continue to rise, she acknowledges the uncertainty of whether this marks the start of another bull run or merely a fleeting moment of joy for traders like herself.

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Michael Ugwu, the angel investor CEO of FreeMe Digital, believes that Bitcoin is experiencing a surge due to better-than-expected economic metrics in the United States. For instance, the inflation rate has decreased from 7.10% to 6.5%, creating optimism among traders that interest rates will fall.

In the past, Bitcoin was viewed as a means of hedging against inflation, but it failed to do so in 2022. Instead, the cryptocurrency is now behaving similarly to the stock market, responding to both micro and macroeconomic factors.

The recent price surge has also been linked to the activities of whales, which refers to individuals or entities that purchase large quantities of cryptocurrencies, enough to influence the market. According to the crypto data firm Kaiko, trade sizes on Binance have increased from an average of $700 to $1,100.

One well-known crypto whale, Michael Saylor, the CEO of Microstrategy, purchased $45 million worth of Bitcoin in December 2022. When whales purchase large amounts of cryptocurrencies, it reduces the supply of crypto, which in turn drives up prices.

One contributing factor to the rise in Bitcoin's price is the growing mining difficulty. According to data from BTC.com, the current mining difficulty has reached 37.6 trillion, indicating that it will require 37.6 trillion attempts to locate a valid Bitcoin block and incorporate it into the blockchain.

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Will the factors affecting the rise of bitcoin stay the same?

Although some economic factors are currently in favor of Bitcoin, this does not guarantee that the situation will remain the same. According to Ugwu, the economic conditions in the US do not alter the macroeconomic conditions that will ultimately impact the crypto market.

The World Bank predicts a 1.7% growth rate for the global economy in 2023, which represents a significant decline. Based on the events of 2022, this estimate may be overly optimistic.

On January 10, 2022, the World Bank issued a warning that the global economy is "perilously close to falling into recession." Even more concerning is the broad-based nature of this predicted recession, with people around the world facing significant declines in earnings.

These macroeconomic factors lead Ugwu to believe that the recent rise in Bitcoin's price will be short-lived. He states, "everything is pumping, and I don't mind; all I know is that it's most likely short-term."

Despite the possibility of crypto whales driving up prices, the overall economic conditions around the world do not bode well for the crypto market. Nonetheless, history has shown that predicting the future of crypto is inherently unpredictable.

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