The crypto comeback: Here's what's driving it, according to Bernstein

Published Thu, Feb 16 202312:27 PM EST

A flurry of factors have come together recently to spark a big comeback for crypto . Bitcoin is up big in 2023, gaining 50%, while ether is up more than 40%, according to Coin Metrics. Those gains come after a difficult 2022 for the crypto market. Last year, bitcoin plummeted 65%, and ether lost nearly 68%. Those losses came as monetary policy tightened around the world and investors moved money into more traditional assets and away from riskier ones. Regulatory fears also increased after major debacles in certain stablecoins and the FTX collapse . This year, however, it seems the beaten-down crypto space is getting some tailwinds. Bernstein analyst Gautam Chhugani said that recent regulatory actions may not be as bad as people think, helping push crypto prices upwards. "The regulatory actions were initially being called 'Operation Choke point', leading to fears that crypto was actively being de-ramped from the banking system, with an attack on stablecoins and custody rules," he wrote in a note on Thursday. A stablecoin is a type of cryptocurrency which attempts to maintain a more stable price by pegging its value to an underlying asset, such as gold or cash . The 2022 collapse in the algorithmic stablecoin terraUSD fueled a massive slump in cryptocurrencies which saw billions of dollars of value wiped off the market. More recently, cryptocurrency firm Paxos said it would stop issuing stablecoin Binance USD , at the direction of New York state's financial regulator. BTC.CB= 1D mountain Bitcoin "From what it looks now, the stablecoin action against BUSD/Paxos (private) was a more specific action against BUSD, and cannot be extrapolated to all stablecoins such as USDC (private)," added the analyst. "Overall, crypto going ahead remains more tightly controlled in the US, but it is not a knock-out." Chhugani also noted that while U.S. regulations tend to dominate the news, elsewhere across the globe, regulation and sentiment are more upbeat. "While the U.S regulations seem to be getting harder, the regulatory murmurs from Hong Kong seem to be net positive, with expected easing of norms," said Chhugani, adding that he "would not be surprised if the crypto market is led by Asia to begin with, until the regulatory fears settle down in the U.S." Short covering may also be contributing to jump in cryptocurrencies. Short covering occurs when a short seller buys back shares in order to close out an open short position — returning borrowed shares — in an attempt to limit losses. This also drives up further the price of the underlying security. But there's more than just short covering — there's fresh buying going on which is forcing prices to squeeze up, the firm said. "While sharp price moves are impacted by short covering, we believe the prices grinding up is also forcing existing crypto investor to dial up exposure with every big move," wrote Chhugani. He added, "The crypto liquid funds we speak to have had fairly conservative exposure levels. While new capital may have been slow to enter the space, there remains adequate capital un-deployed within the ecosystem of crypto funds, which have largely remained risk-off so far." —CNBC's Michael Bloom contributed to this report.