Bitcoin is headed for its best start to the year since 2013 as risk appetite grows ahead of expected smaller Fed rate hike

• Bitcoin's price has surged 40% since the beginning of the year, according to Messari.
• The rally comes ahead of expected smaller rate hikes from the Federal Reserve next week.

Bitcoin is on track for its best January since 2013 as the prospect of slower rate hikes from the Federal Reserves has increased the risk appetite among investors.

On Friday, the token dipped 0.3% to $23,000. But it's up 40% so far this month, according to Messari, and eyeing the 51% jump seen in January of 2013.

Other cryptos are continuing to rebound as the industry regains its $1 trillion market capitalization. Ethereum is up 32% in the past month.

"Bitcoin is up +40% year-to-date with +35% of those returns occurring during US-trading hours. That's an 85% contribution of the rally associated with U.S.-based investors," Markus Thielen, head of research and strategy at digital asset services provider Matrixport, wrote in a note to clients on Friday.

The rally seems driven by the belief that the Federal Reserve will ease back further on aggressive rate hikes following signs of cooling inflation.

Core PCE data, which shows a fuller picture of consumer costs and spending, indicated that prices rose at a slower pace last month, the Commerce Department reported on Friday, giving leeway for the Fed to ease up on monetary tightening.

"More measured rate hikes globally tilting to stability will reduce the headwinds as BTC edges towards fresh heights. But overall investors are more — mentally and portfolio wise — prepared than ever to deal with volatility," Nathan Thompson, a lead tech writer at crypto exchange Bybit, told Insider in a statement.

"The broader implication is that these movements reflect BTC's increasingly significant role in economic cycles, in some cases as a hedging asset in capital markets."

All eyes are on the Federal Open Market Committee's (FOMC) meeting next week, when the central bank is expected to announce a smaller increase in the fed funds rate.

"Once again, it would seem that the price of bitcoin, like risk-on equities such as tech stocks, is responding to positive macro data, including the high likelihood of a smaller 25bp increase in the fed rate, which CME futures traders appear to be pricing with a 98% certainty," Bradley Duke, co-CEO at digital assets ETP provider ETC Group, told Insider in a statement.

Crypto markets seemed to have moved past a slew of bad news for the industry, including the bankruptcies of major firms like crypto exchange FTX, lender Genesis, and hedge fund Three Arrows Capital over the past year.

Matrixport's Thielen said supporting the rally is a "clear signal" that US institutions are buying up bitcoin right now.

"Institutions are not only buying bitcoin spot; rather, we are also seeing consistently high premiums for perpetual futures," Thielen said. "We interpret this as an indication that faster institutional traders and hedge funds are actively buying the recent dip in crypto markets."