After a rocky start to the year, bitcoin (BTC) appears to have stabilized this week, and some analysts are predicting that prices could be set to rise.

Bitcoin has added 1% since Sunday after dropping almost 12% in the first week of 2022. Compared with the first week of 2021, when bitcoin gained 15% and traded above $50,000, this week's move looks small, but experts say the market might be turning higher now.

Prices are likely to rebound from the current level around $42,000 though will remain within the $40,000-$60,000 band, said Gavin Smith, CEO of Panxora.

“This would set bitcoin up for a move to new highs later in the year,” he said. “We predict the catalyst for this move to be stubbornly high inflation numbers coupled with a continuation of negative real interest rates.”

A "real" interest rate is adjusted for inflation, so when the figure is negative, it means that consumer prices are rising faster than benchmark bond yields. The dynamic – a function of ultra-loose monetary policies put in place by central banks around the world – encourages risk-taking since investors are effectively losing value by holding bonds and other fixed-income instruments.

The U.S. Labor Department said Wednesday that the Consumer Price Index, the nation's most widely tracked inflation gauge, rose 7% in December from 12 months earlier, up from 6.8% in November. This is the fastest annual increase since 1982.

While bitcoin has recovered after dipping below $40,000 on Monday, this rebound is nothing by bitcoin standards, according to Craig Erlam, senior market analyst at Oanda.

“If bitcoin can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it,” Erlam wrote in a daily newsletter on Thursday.

Risk asset or inflation hedge?

The U.S. Dollar Index is down 0.97% in the last five days, a move that is generally considered bullish for bitcoin and other dollar-denominated asset prices.

“This is certainly good for risk assets and it has become more and more evident that BTC falls under that bucket, at least for now,” said Lucas Outumuro, head of research at IntoTheBlock.

Bitcoin "has been behaving more as a risk asset recently amidst market uncertainties," said Lennard Neo, head of research at Stack Funds. “The markets are still split if BTC is an inflationary hedge or risk asset, and with the current macro climate, expect more volatility in the short term.”

Whether bitcoin is seen as a risk-on asset or as a clear inflation hedge is dependent on geography, according to Jason Deane, an analyst at Quantum Economics.

In developed economies, bitcoin is very much seen as a risk-on asset and is being traded based on macroeconomic developments, such as inflation and central-bank stimulus programs, according to Deane. In developing economies like Turkey, Brazil and Argentina, however, there is a clear inflation-hedge play.

“As a result of this, direction is not clear and we fully expect unpredictable, choppy moves in a broadly sideways range for the time being,” Deane said.

Looking at the price of bitcoin in the long term, Deane predicts continued growth, development and adoption on a global scale.

“At some point this will become the dominant narrative and almost certainly lead to new price discovery in the future,” Deane said.