When a market rises strongly after a prolonged decline there are two possibilities: the first is that it extends the advance and this becomes a Bull Market, although it can also reverse its movement and fall to deeper lows.
The price of Bitcoin, the first and leading cryptocurrency by market value, has recently recovered. From its low of the year of 17,611 dollars per unit, today it is trading at just over 23,500 dollars, with an appreciation of more than 33 percent.
And it’s not just about Bitcoin, crypto market buyers are at their best since October of last year. The price of Ethereum, the second largest cryptocurrency, has rallied more than 80% over $1,600 from $883.62.
This contrasts with what has been observed in traditional financial markets that still show signs of disbelief in their rebounds. For example, the S&P 500 index of Wall Street, struggles before 10% with 4,000 points against the low of 3,636.82 points.
Specialized platform data CoinMarketCap show that the total value by cryptocurrency market capitalization exceeded one trillion dollars again. It is valid to question the rally given the history of the market and the economic context.
Doubts about the rebound
Amid a season of so far mixed quarterly reports and fears of accelerated interest rate increases, investors are still operating cautiously and anticipating a possible global recession caused by high inflation.
From the Institutional Monetary Fund (IMF), to respected firms like JPMorgan and tycoons like Elon Musk, the voices warning of a recession are growing. But the cryptocurrency market seems to want to show a very different reality.
With rallies of more than 20% from the most recent lows (which in other markets are often seen as the entrance to a bull market), cryptocurrency prices are the first reminder that we play by different rules here.
A market is considered bullish when it rises 20% after falling 20% in a bear market, a period in which it must mark a clear low. “But, let’s remember that there are cryptos that can give or subtract 20% in a day,” said Eduardo Ramos, an analyst at ATFX.
the change of hands
According to cryptocurrency trading platform Bitfinex, during a bear market, retail traders are pushed out by sharp declines. This causes long-term holders to increase their positions.
In other words, for a bottom to form in the price of Bitcoin, the sector of traders who have less conviction will have to sell their positions to others who can sustain losses longer, and short-term traders.
The SOPR (Spent Output Profit Ratio) is a ratio that allows detecting overbought and oversold areas, with information on what type of hands the units acquire. This indicator takes the information from the blockchain.
“A ratio of less than 1 indicates that the holders sell at a price lower than the base cost. When Bitcoin bottomed out in 2018, the ratio was 0.48 and it is currently 0.68. The long term has a loss of 32%,” Bitfinex said in a report.
The drop is significantly smaller and the hash rate (an indicator of processing power that follows price) has not yet picked up, showing that miners do not see the rebound as attractive, weighed down by energy costs, he added.
Who benefits from the upturn?
Since June, prices have begun to adjust due to an increase in traded volumes, which are mainly observed in Bitcoin, Ethereum and Tether, a currency used to convert dollars to crypto.
For Octavio Pacheco, an expert operator in the crypto market, this means that the positions are in the hands of retailers, which increases volatility in the face of significant indecision in the market, which may fall again.
“The most important central banks are raising their interest rates. The era of cheap money has come to an end and with it we are seeing smart investing in risky assets decline in favor of debt,” he explained.
Pacheco stated that, due to rate increases to combat inflation and the possibility of a recession, it is very likely that prices will fall again and hit new lows: “This is highly probable,” said the expert.
“The current environment in the crypto market only benefits traders and, above all, exchange platforms. Until the consolidation is final and there is an answer to the economic fears, we are in a casino”.
