On Monday, the price of bitcoin rose by more than 3 percent, making it the first day of the month that it cost more than $27,000. In early morning trade, the flagship cryptocurrency soared to a high of $27,403, before settling near $27,300 by midday.
Gains of roughly 2% let Ether, the second-largest cryptocurrency by market capitalization, trade above $1,650. Solana, Cardano, Binance Coin, XRP, Polkadot, and Polygon were among the other notable cryptocurrencies that had gains of 1-5%.
Kaiko, a cryptocurrency analytics company, claims that a surge in trading volume from Asian markets around opening hours was the primary factor in the gain. Experts warn that extreme price swings are possible when there is little buying and selling pressure, as is the case in low liquidity circumstances.
According to Dessislava Aubert, a senior research analyst at Kaiko, “in the current low liquidity environment, relatively low buying and selling pressure could amplify spot price movements and spur liquidations on derivatives markets.”
The rise in trading volume can be attributed to a weekend Nikkei report that stated Japan might eventually permit businesses to sell digital tokens to venture capital funds. It appears that market confidence has been bolstered by this planned regulation reform.
Also, stock markets were generally heading higher before this week’s highly anticipated Federal Reserve policy meeting. The Federal Reserve is widely expected to keep interest rates steady, but indications regarding potential rate increases have garnered significant attention.
Only 31% of traders using CME Group’s FedWatch expect a rate hike in November. Equities and cryptocurrencies alike have risen on the back of this dovish view.
Bitcoin has had its first consecutive weekly increases since May, which has led to the latest upswing. After being mired in a bearish trend for most of 2022, the cryptocurrency finally broke free of that pattern last month when its 50-day moving average fell below its 200-day moving average.
Some investors in cryptocurrencies interpreted this as a warning indication that long-term momentum was beginning to weaken. Others suggested that it was only temporary volatility in a resource that was always going to be unstable.
The fact that the price rose above $27,000 on Monday supports the latter theory. As bitcoin recovers from a severe summer selloff, this increases the cryptocurrency’s monthly gain to roughly 4%.
Global Economic Tendencies
Risky assets, like as cryptocurrencies, continue to face headwinds from the larger macroeconomic climate. As a result of persistent inflation, major central banks have rapidly raised interest rates this year, leading to concerns of a worldwide economic downturn.
In August, consumer prices in the United States were 8.3 percent higher than they were a year earlier. As a result, the Federal Reserve has increased its benchmark rate from 2.25 to 2.50%, a rise of 300 basis points since March.
This summer, following years of quantitative easing, the Fed finally started reducing its $9 trillion balance sheet. The markets have suffered, and growth forecasts have been dimmed, as a result of this tightening of policy.
The cryptocurrency market crashed in 2022 due to high inflation and recession fears. In November 2021, the price of bitcoin reached a record high of about $69,000, but by June 2022, it had fallen to approximately $19,000. In addition to ETH, several big cryptocurrencies also experienced drawdowns of 70% or more.
Recent Consumer Price Index numbers, however, indicate that inflation in the United States may have crested. The Fed has hinted that it may slow the rate at which it increases interest rates. A soft landing for the economy is something investors are hoping the Fed can help facilitate.
Risk assets like bitcoin and tech stocks may have a late-year upswing if inflation continues its downward trajectory, the Fed slows the pace of its rate hikes, and a recession is avoided.
Uncertainty persists, of course, in the macro environment. Some analysts still anticipate a U.S. economic downturn in 2023. The conflict between Russia and Ukraine has already caused an energy crisis in Europe. China’s housing market and the country’s zero-COVID policy are both contributing to the country’s economic difficulties.
Bitcoin’s ability to maintain its momentum over $27,000 and push higher depends on how all these intricate forces play out.
Coin Market Sentiment
Bitcoin’s recent upswing appears to be driven in part by fundamentals within the cryptocurrency ecosystem, independent of macro influences.
The number of active addresses and the number of transactions on the Bitcoin blockchain have both been on the rise since their summer lows. After precipitous decreases in June and July, mining difficulty has leveled off.
According to data compiled by CoinShares, investor interest in bitcoin investment products is on the rise again after seeing significant withdrawals earlier this year. Last week, $24 million flowed into cryptocurrency funds, reversing the $9 million outflow seen the week before.
Additional evidence suggests that forced sellers, including leveraged speculators and miners, have depleted their bitcoin holdings. This eases sellers’ pressure and improves the prospects for a lasting price bounce.
Bitcoin and Ether are also oversold on short-term timeframes, as seen by the Relative Strength Index and other technical indicators. It is likely that they will experience some improvement now.
Underwater short sellers are likely fueling the latest rise by closing off bearish bets in an effort to lock in profits following the selloff. As price increases cause additional shorts to cover their positions, this dynamic can fuel further gains.
However, whether or not the current rise has actual legs depends on whether or not long-term HODLers are once again feeling positive. Despite the lower prices, these investors have not yet resumed their massive Bitcoin accumulation, as evidenced by the on-chain statistics.
The next big jump in prices will be driven in large part by their involvement. However, if prices rise, it may entice some of these investors to return.
Changes to the Regulations
Regulator ambivalence toward cryptocurrencies may contribute to investors’ wariness. Recent progress in this area is helping clear up some of the confusion.
Defining clear standards for cryptocurrencies without inhibiting innovation is a primary goal of the Japanese government’s aforementioned intention to allow startups to issue tokens. This strategy stands in stark contrast to the more restrictive rules in China and the uncertainties in Europe with the demise of TerraUSD.
The United States finally passed the crypto sections of the infrastructure bill that had been anticipated for a long time. The guidelines laid out here make it clearer what bitcoin dealers need to report. Back in March, the Biden administration also issued an executive order on the regulation of cryptocurrencies.
Even if it means harsher rules, greater regulatory clarity can drive wider institutional use of bitcoin and release dormant demand.
But the high-profile collapse of Celsius, Voyager Digital, and other leveraged crypto businesses reveals flaws in DeFi regulation. Unchecked risk-taking in areas such as staking yields will likely face a regulatory crackdown.
However, as long as it eliminates dishonest characters without limiting innovation, stricter regulation is not always bad for bitcoin. In the long run, widespread mainstream adoption may be facilitated by clear guidelines.
To conclude
The macroeconomic and on-chain fundamental conditions have been improving, which has led to Bitcoin’s breakout above $27,000. There may also be a role for short-covering and waning bearishness.
Whether or not strengthening technicals can influence market sentiment will determine whether or not the recent uptrend can be maintained.
Bitcoin might continue its run towards the end of the year if inflation continues its downward trend and the economy avoids recession. It is premature to declare the bear market over as macro conditions are still precarious.
Nevertheless, Monday’s surge gives us reason for moderate confidence. Bitcoin’s bullish case would be bolstered if prices continued to rise above $28,700, its 50-day moving average. Traders need to know if the recent Bitcoin price increase is just a dead cat bounce or if Bitcoin can sustain itself at or over $27,000.