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The surge in crypto trading volumes in the last quarter, accompanied by the increase in token prices, may not necessarily imply an increase in demand. According to Ambre Soubiran, the founder and CEO of Kaiko, a closer look at Bitcoin’s rally reveals that the depth of demand may be deceptive. Although Bitcoin trade volumes spiked in the first quarter of 2023, two trading pairs, Bitcoin-Tether and Bitcoin-BUSD, stood out during that stretch. Nevertheless, Kaiko’s data showed that Bitcoin’s trading volume was the lowest it has been since 2020. Therefore, the price action was not necessarily accompanied by a corresponding increase in demand.

Bloomberg reported that despite this, Bitcoin, the largest digital currency by market capitalization, has risen by over 70% since January 2023, outstripping an 8% climb in global stocks. This surge in Bitcoin’s price follows a series of high-profile bankruptcies that sent Bitcoin’s price tumbling from a peak of around US$68,000 in November 2021 to just over US$15,000 in November 2022. The failure of Swiss bank Credit Suisse and three United States banks, two of which did business extensively with the crypto sector, also contributed to Bitcoin’s rebound.

These events have revived the case for crypto as an alternative, decentralized banking system unhampered by financial intermediaries. Furthermore, they are testing the US Federal Reserve’s resolve to keep interest rates high. In 2022, the Fed started hiking rates to tame inflation, a move that triggered an outflow of cash from risky assets like crypto but has since hurt parts of the economy.

It is important to note that crypto valuations are mostly based on speculation. The market has yet to find a way to fundamentally value Bitcoin and other cryptocurrencies. A research paper by the CESifo International Research Network in February noted that investors tend to view cryptocurrencies as a gamble rather than a way to pay for real economic transactions.

Users are more likely to make active use of crypto exchange apps in the months after a rise in the price of Bitcoin. CESifo estimated that between 73% and 81% of global investors have likely lost money on their crypto investments, and that larger investors, known as whales, have tended to sell when smaller investors are buying.

Research published in the Journal of Risk and Financial Management in February noted that crypto can be influenced by factors such as changing regulations, liquidity and technical issues, and market sentiment. Therefore, investors should always make sure they understand the risks involved before dabbling in crypto.

The Monetary Authority of Singapore (MAS) strongly discourages speculation in cryptocurrencies. However, it noted in 2022 that easy access to crypto and its appeal to consumers enticed by the prospect of sharp price increases warranted a more comprehensive set of regulatory measures to reduce the risk of consumer harm. MAS will soon adopt a risk-focused approach to regulating the digital asset ecosystem. It has also noted that regulations need to be clear and proportionate to the risks posed to facilitate innovation in the sector.

Crypto has come under greater scrutiny globally following 2022’s collapses. In 2023, it is important for investors to weigh the risks involved and make informed decisions before investing in crypto.