As Bitcoin approaches $25,000, questions remain about the rally’s sustainability

It’s no secret that the global economy has continued to weaken over the past year. To this point, on January 19, the United States government hit its “debt ceiling,” i.e., the total amount of money the U.S. Treasury can borrow to finance its ongoing federal operations, prompting renewed concerns of more economic pain and economic slowdown can come.

Similarly, on the other side of the Atlantic, Britain has also struggled. This is made clear by the fact that the number of company insolvencies recorded in 2022 reached 22,109 – an increase of 57% on the previous year and the highest rate since 2009. Not only that, the International Monetary Fund recently released a report suggesting that the UK would be the only G-7 nation to face a recession this year.

However, in the midst of all this destruction, the crypto market seems to have gained some wind in its sails in the past month. In January, the total capitalization of this sector rose from $828 billion to approximately $1.1 trillion, signaling an increase of nearly 32%. Focusing on Bitcoin (BTC), particularly on January 30, the cryptocurrency rose to $24,000 after seemingly stagnating around the $16,500 range for the better half of November and December.

In fact, the asset’s share of the market’s total cap rose as high as 44.82% recently, the highest level since June last year. As a quick measure, this figure usually rises so steeply only when investors begin to limit their exposure to altcoins and pour their capital back into BTC.

Is $25,000 the Next Stop for Bitcoin?

After defending a price target of $22,500 since January 20, Bitcoin is currently showing a 30-day profit ratio of around 40%. This peak has been mirrored by similar gains in the stock market, which recently rose after China eased its COVID-19 restrictions after three long years of strict pandemic control.

Furthermore, according to data made available by financial firm Matrixport, US institutional investors currently account for 85% of all recent Bitcoin accumulation activity, suggesting that mainstream players are not ready to give up on the digital asset market. To get a better understanding of where the industry may be headed in the near term, Cointelegraph caught up with Timothy T. Shan, COO of Avalanche-based decentralized exchange Dexalot. In his view:

“I think the recent rally in Bitcoin has been a positive surprise given all the negative news in the industry that has yet to play out. That said, I don’t think this current rally is sustainable and users should expect more volatility.”

On a somewhat similar note, Frederic Fernandez, co-founder of DeFi trading application DEXTools, told Cointelegraph that the new year could be bullish for the crypto market if and only if the global economy is able to create some kind of recovery. This is because a large-scale trend reversal could increase demand for alternative investments and increase liquidity in the market.

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“The market may remain bearish if economic uncertainty increases as restrictive regulations may be imposed. However, if Bitcoin reaches $25,000, it could mean increased confidence and acceptance of cryptocurrencies leading to increased investment and widespread use,” he added.

Important market indicators

According to Luuk Strijers, commercial head of Bitcoin and Ether (ETH) options exchange Deribit, the crypto market is slowly returning to greener pastures. To support this claim, he told Cointelegraph that the market is once again witnessing a “contango”, a situation where the futures price of an asset is higher than the spot price. In layman’s terms, a contango is usually observed when the price of a particular asset is set to rise over time.

He said BTC’s 25-delta bias has moved from above 30% to below zero, a bullish indicator. The above calculation allows analysts to predict the price movements of an asset, as well as estimate future fluctuations (volatility) based on certain predictive factors. “A drop in the 1-month bias indicates that the shorter-dated out-the-money calls are becoming more expensive relative to the out-the-money puts, which is a bullish signal,” Strijers noted.

He also highlighted that open interest in Bitcoin and Ether options has grown again, which is a positive sign especially when you consider that much of this momentum was lost after last year’s big year-end sell-off.

Not only that, Strijers pointed out that the options market’s put-call ratio (PCR) hit a local low at the end of last month, suggesting that investors may once again be warming up to the digital asset industry. PCR is an indicator that is often used to determine sentiment around the options market.

Market sentiment analyzed

In the last week of January alone, digital asset investment products available in the market witnessed a cumulative capital inflow of $117 million, the largest amount in the last 180 days. Investors mostly put funds into BTC-related offerings, which accounted for $116 million of the aforementioned figure.

Furthermore, the volume of digital investment products has continued to rise, approaching $1.3 billion as of January 30, up 17% compared to its year-to-date value. However, short-Bitcoin products recorded $4.4 million worth of inflows, which does not bode well for investor sentiment, according to Coishares’ researchers.

Multi-asset investment vehicles saw money drain from them for the third straight month, with those outflows totaling $6.4 million. According to Coinshares, this suggests that more investors are starting to move towards proven crypto-assets.

Finally, the Crypto Fear and Greed Index, a tool that helps investors measure crypto market movements and sentiment, currently stands at 60. This number represents “greed”, i.e. people are looking to buy digital assets as they believe more bullish traction can be coming in the short term

What lies ahead of the market?

From a macro perspective, Shan believes the Federal Reserve is close to reaching its terminal interest rate target – the neutral rate at which prices are stable and full employment is achieved – which is currently just above 5%. In his view, the Fed will hold this number for the full year, while noting that any looming recession will be very mild, one that shouldn’t affect the crypto market too much.

He further noted that there will most likely be strict regulations in the short term which, if done correctly, can help the market immensely. “The industry can grow exponentially just because of good regulations as they will open the door for mass adoption in the next 10+ years,” Shan said.

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Finally, the hard sell as well as the various cases of fraud, over-leveraging, poor control and governance over the past year have been a good reset for the crypto-economy, in his view. This is because they can help serve as lessons for the industry, so that participants can act responsibly and allow the industry to flourish sustainably.

Therefore, as we move into a future fueled by increasing economic uncertainty, it will be interesting to see how the landscape of the digital currency market continues to evolve, especially with Bitcoin and other major cryptos making a minor comeback at the moment.