Cryptoverse: Big investors return to bitcoin

Jan 31 (Reuters) – Big investors are dipping their toes back into crypto waters after a bumper month for bitcoin.

Investment products for digital assets, often favored by institutional investors, saw inflows of more than $117 million last week, the biggest weekly increase since last July, according to data from asset manager CoinShares.

Bitcoin was by far the biggest draw, with funds tracking it responsible for $116 million of that. Crypto funds’ combined assets under management have risen to $28 billion, up 43% from lows in November when the collapse of the FTX exchange sent shockwaves through the industry.

“For the most part, people are more confident than they were a month ago,” said Joseph Edwards, investment adviser at Enigma Securities.

Bitcoin, the native cryptocurrency, has rallied nearly 40% in January, approaching its best monthly performance since October 2021 and the second best January in the last 10 years.

The rally, coupled with a possibly brighter macro picture, has some investors hoping that the long crypto winter may finally be approaching spring. Many investors expect the US Federal Reserve to raise its benchmark interest rate by 0.25% this week – the smallest increase since its tightening cycle began last year.

“If peak inflation is indeed behind us for now, long-term yields could move lower as we approach the end of the inflation-focused rate hike cycle,” analysts at Fidelity Digital Assets wrote.

“This could signal positive momentum on the macro front for assets like bitcoin.”

Activity in the options market indicated that traders rushed to place bets soon after the Fed meeting, a sign of the importance the market is placing on it, crypto-liquidity provider B2C2 said.

Crypto trading volumes are also rising, according to CoinShares, with average weekly volumes up 11%, indicating that traders are returning after months of subdued activity.

Still, crypto isn’t out of the woods for long, and the Fed could still spoil the party if they take a more hawkish tone this week.

Crypto data platform Coinglass’s bitcoin Fear & Greed index – where 0 indicates extreme fear and 100 extreme greed – is hovering at 61, its highest level since mid-November 2021, just after bitcoin began to pull back from its peak.

“We may see a drop in the next week or two, how deep it goes is questionable,” Edwards said.

BITCOIN ‘DOMINANCE’

Nevertheless, there are also other signs that the end of the bear market may be near, according to analysts at the exchange Bitfinex. They said that short-term investors sold bitcoin at a profit, while longer-term “HODlers” still held onto their coin and did not contribute to selling pressure.

“The realized result for the whole market has been recorded as positive in January 2023 for the first time since April 2022, a continuation of this trend will signal the end phase of a bear market,” they said.

In addition, bitcoin’s “dominance” or share of the total crypto market has hovered around 41% this month, levels not seen since last July. Analysts at Citi said this mimicked a similar jump in bitcoin dominance in April 2019, when a bitcoin rally marked a bottom in the crypto market.

Other market watchers said stocks, another relatively risky asset class, are likely to drive bitcoin prices next week, particularly the performance of interest-sensitive technology stocks.

Bitcoin’s correlation with the Nasdaq (.IXIC) is at 0.94, the highest since May 2022, with a measure of 1 indicating the two are moving in lockstep.

In late November, bitcoin broke its bonds with stocks and traded with a negative correlation of 0.7.

“It is possible that bitcoin could reach the next resistance level of $25,200 in the coming weeks,” said Rachel Lin, CEO of Exchange Synfutures. “Even if bitcoin ends up rebounding, there’s a decent chance it will make a higher low on the larger time frame.”

Reporting by Lisa Pauline Mattackal and Medha Singh in Bengaluru, Alun John in London; Editing by Pravin Char

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