Bitcoin’s rally to USD$30,000 – what’s driving the surge?

Bitcoin's current rally has experts divided on what's fuelling the growth.

Bitcoin has crossed the USD$30,000 (AUD$45,092) mark for the first time in 10 months, posting a 90% increase since its 12-month low of $15,742 in November 2022, which followed the collapse of crypto investing platforms Celsius and FTX.

As for what is fuelling the rise – the case is likely two fold.

On one side you have the argument that Bitcoin is fulfilling its promise of offering an alternative financial system, and serving as a hedge during times of turmoil. On the other hand analysts argue that macroeconomic conditions are actually improving, and this signals a return to risk-on investing which has historically benefited Bitcoin.

A hedge during uncertain times

It's easy to understand why investors might be losing faith in traditional finance. Today's move arrives amid global financial stress – rising inflation, a cost of living crisis, soaring rental and energy prices, a war in Europe and an unfolding banking crisis in the US that has already spread abroad to Credit Suisse in Switzerland.

While the crisis in the US has so far affected only Silicon Valley Bank and Signature Bank, analyses suggest this may be temporary.

The International Monetary Fund (IMF) released a 126-page report on Wednesday on the fragility of the global financial system, stating that "financial sector vulnerabilities are building up" and "strains are still evident across other institutions as investors reassess the health of the financial system".

Stress in the private sector only further compounds the challenge central banks have on their hands with taming inflation and managing monetary supply.

Bitcoin is considered a "hard asset" by some investors due to its fixed and predictable supply which operates outside the constraints and weaknesses of the banking system. Its appeal during times like these is as a hedge – an independent monetary system that could, theoretically, withstand stressors that traditional finance cannot.

On the other hand, Bitcoin is still seen by many as a speculative asset which leaves it subject to the same macroeconomic trends that dog traditional investments, such as rising – or falling – interest rates.

Lower interest rates and inflation

Some experts believe Bitcoin's current trend results from expectations that inflation will soften and lead to a lower interest rate environment.

Josh Gilbert, Market Analyst at eToro, explains why:

"Given its high-risk profile, Bitcoin is sensitive to lower interest rates, as investors tend to take on more risk in such an environment. Therefore a fall in inflation, which would see the Federal Reserve ease off its aggressive tightening cycle, would be hugely positive for bitcoin."

Analysis of the US bond market indicates traders are expecting rates to fall by the end of the year, despite the speculation there will be at least one more rate hike before the trend reverses.

"In reality, inflation is moving in the right direction, but it may not be falling as fast as the Federal Reserve would like, which is what we will find out this week. If this week's inflation number is still higher than desired, then that may turn the dial towards another rate hike... In case the inflation rate exceeds the expected value, the crypto market may see some weakness, given that this market has priced in an end to rate rises."

The US Federal Reserve will announce March inflation figures Thursday.

Two narratives, one result

So the case for bitcoin is two-fold; one side of the aisle might argue its price is being spurred by its status as an alternative asset that could be a hedge against further economic turmoil, while others would argue the worst is behind us, and Bitcoin is benefiting from a return to risk-on investing.

The reality, as it always has been for Bitcoin, lies somewhere in the middle.

Disclosure: The author owns a range of cryptocurrencies at the time of writing.