Cryptocurrency prices are bouncing back, but analysts warn that investors may want to move carefully.
Bitcoin (~BTCUSD) was up slightly to $22,898 on Jan. 26, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was edging up to $1,605.60, while dogecoin gained nearly 1% to $0.086554.
Frank Corva, senior analyst for digital assets at Finder, said that in the last three weeks, the price of Bitcoin has risen from just under $17,000 to just over $23,000, while the price of Ether has experienced a similar rally, "rocketing from just under $1,200 to almost $1,700 in the same time frame."
"These notable price moves beg the question: Is this the start of a longer crypto bull market or are we in the throes of a bull trap?" he said. "What happens next may depend on the severity of The Fed’s next interest rate hike, which is scheduled to be announced on Feb 1."
Corva said that while markets seemed to be pricing in a 25 bps rate hike about a week ago, some notable economists have begun predicting a 50 bps rate hike as of the last few days.
He added that if the Fed only hikes 25 bps, the prices of many risk-on assets – including crypto – will likely continue in their uptrend, but if the Fed hikes 50 bps, the prices of risk-on assets will likely trend lower.
"Looking at the crypto market through a more micro lens, some of the anxiety around the Gemini Earn product has subsided," Corva said. "Crypto markets were unperturbed last week when Genesis – the company to which Gemini outsourced the facilitation of its Earn program –filed for Chapter 11 bankruptcy protection."
Traditional Financial Companies Ease Up on Crypto
This may be some indication that crypto investors are starting to recover from the PTSD they felt in the wake of FTX’s implosion, but Corva said that if 2022 taught crypto investors anything, "it’s that we never know where and when the next blow up might occur, and we don’t know if we’ve yet seen all of the fallout from the collapse of FTX."
"So, even if we are in the early stages of a crypto bull market, investors may still want to proceed with caution," he said.
Crypto investors may be less anxious about the Genesis meltdown, but Winston Ma, adjunct professor at New York University Law School, said traditional financial institutions are cooling on crypto.
He pointed to the Signature Bank (SBNY), an FDIC-insured institution that was early to the crypto game, which was reducing its exposure to digital assets and would only handle dollar transactions for individual crypto customers who buy or sell amounts more than $100,000.
"The banking regulators’ warning on the first working day of 2023 probably was the main trigger," said Ma, author of Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse. "The Fed, the F.D.I.C. and Office of the Comptroller of Currency issued a joint statement outlining the risks for institutions handling crypto."
In addition, Ma said, the contagion of crypto liquidity-providers’ failure may be an important factor, too.
"The industry’s big players are deeply entwined, as the aftermath of FTX bankruptcy showed," he said, citing Genesis, a subsidiary of billionaire Barry Silbert's crypto empire, as the latest casualty of a meltdown in digital assets over the past year.
FBI Calls Out North Korean Hackers
"The sentiment of traditional financial institutions like Signature Bank is likely to be the harbinger of when the crypto markets fully emerge from the crypto winter," Ma said.
On the enforcement side, David Lesperance, managing partner of immigration and tax adviser with Lesperance & Associates, said the FBI has announced that North Korean hackers used crypto mixer alternative Railgun to launder more than $60 million stolen from Harmony's Horizon Bridge.
North Korea’s state-owned cybercrime entity the Lazarus Group is most famously linked to the 2014 Sony Pictures hack.
"Unlike a traditional mixing service, Railgun does not seek to obfuscate transactions by mixing multiple transactions together," he said. "Instead, it uses zk-SNARKS cryptography to make transactions fully invisible."
Last year, the U.S. Treasury Department placed the Lazarus Group on a designated list created by the Office of Foreign Assets Control Specially Designated Nationals and Blocked Persons for its role in the "Axie Infinity" crypto attack.
"The question now is will Railgun be the next target of crypto sanctions by the OFAC?" Lesperance said. "In August, OFAC imposed sanctions on the Tornado Cash mixing service citing its use by Lazarus Group hackers, to launder part of the $100 million stolen in June's Harmony Protocol hack."
Tornado Cash developer Alexey Pertsev is being held without bail in The Netherlands, where he faces money laundering charges for his involvement in building Tornado Cash.
Lesperance said that at the time of the Tornado Cash prosecution OFAC warned that it would "continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them."
