Bitcoin experienced a reversal in its new year rally on Wednesday as investors closely monitored the Federal Reserve’s policy outlook and awaited updates on the Securities and Exchange Commission’s (SEC) decision regarding a bitcoin exchange-traded fund (ETF). The price of bitcoin dropped more than 4% to $42,685.85, according to Coin Metrics. Earlier in the day, it fell as much as 6%, erasing most of its gains from Tuesday when it reached its highest level since April 2022 at $45,913.30. Ether also saw a decline of over 6% at $2,221.27, while other coins, such as Solana, Ripple’s XRP, litecoin, and dogecoin, recorded steeper losses of 7%, 6%, 10%, and 9% respectively.
The potential lack of approval for a bitcoin ETF this year, contrary to the expectations of bitcoin bulls, led to some concern and triggered unease among short-term traders. This uncertainty prompted investors to unwind their long positions, especially considering the rapid increase in leverage. Economist and author Noelle Acheson stated that the recent events “triggered some jitters in short-term traders who then decided to unwind long positions, especially since leverage had been increasing fast.”
Amidst the market concerns, Bernstein released a note expressing confidence in the approval of the ETF. Analyst Gautam Chhugani wrote, “We continue to maintain that all price dips to the ETF are market opportunities to buy bitcoin/bitcoin miners, and the market will likely bounce materially off the actual approval event (likely end of next week).” On the other hand, Darius Tabatabai, co-founder of decentralized exchange Vertex Protocol, cited the crypto market’s overheated state after experiencing seven months of continuous bitcoin price increases. He mentioned that “higher leveraged prices in thin markets is not generally a good recipe for stability, and the washout today seems relatively healthy.”
Towards the end of December, bitcoin funding rates reached their highest level since October 2021. These rates, determined by exchanges to balance derivatives contract prices and asset prices, indicated potential market instability. Richmond Federal Reserve President Thomas Barkin warned that although he expects a soft landing, interest rate hikes remain a possibility. Additionally, the minutes from the Fed’s latest meeting emphasized the uncertainty surrounding the path to lower interest rates, as policymakers “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time” depending on inflation. This economic outlook has significantly impacted not only the price of bitcoin but also other markets such as stocks, bonds, gold, and the dollar.
Historically, January has not been a particularly strong month for bitcoin. Based on data from CoinGlass, bitcoin has only ended the month in the green in five out of the last 11 years. However, prior to the new year rally, bitcoin experienced three weeks of consolidation, concluding with a 12% increase in December. Looking back, bitcoin had a remarkable performance in 2023, soaring by an impressive 157%.
Bitcoin’s recent reversal in its new year rally reflects the cautious approach of investors as they closely monitor the Federal Reserve’s policy outlook and await updates on the SEC’s decision regarding a bitcoin ETF. Uncertainty surrounding these factors has led to a decline in bitcoin’s price, prompting short-term traders to unwind their long positions. Analysts offer varying perspectives, with some expressing confidence in the approval of the ETF, while others highlight the potential risks associated with an overheated crypto market. The recent spike in bitcoin funding rates and the outlook of interest rate hikes further contribute to the market’s volatility. As bitcoin’s performance in January has historically been mixed, investors continue to navigate the complex dynamics of the cryptocurrency market.
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