Brace For A Bear Market or Risk Seeking into Year-End? Bitcoin and Ether Recover from Weekend Sell-Off


The crypto market seems to be back on the move as Bitcoin climbed above $58,300, and Ether went on to hit $4,380 on Monday.

The total market cap has also risen past $2.7 trillion after we dropped to $2.54 trillion late on Sunday that had Bitcoin going under $53,300 and Ether $3,965.

“Everything bouncing,” commented Alex Kruger, trader, and economist. “As I said, markets had over reacted in thin holiday liquidity. Over-reactions are followed by reversals.”

These gains in the crypto market followed the recovery seen in the broad stock market. The S&P 500 saw an uptick after last week’s 2.5% drop. During this ordeal, gold gained momentum and jumped 2% to just above $1,815 per ounce, but it didn’t last long as it wiped out all the gains but has now recovered some to $1,794.

Amidst this, the US dollar also experienced a drawdown to 95.75 over the weekend after hitting a new 2021 high at 96.9 and is now at 96.35.

Besides the new variant of COVID-19 Omicron, the U.S. Thanksgiving holiday and the release of the Federal Reserve’s minutes from Nov. 2-3 showed that officials were open to removing policy support faster to keep inflation in check affected the market earlier in the week. The minutes read,

“Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher.”

Data on inflation has actually worsened since the meeting as figures for October show the highest inflation rate since 1990.

At the meeting, the FOMC decided to begin scaling back the pace of purchases, targeting mid-2022 to complete the process while leaving interest rates near zero. Completing the taper earlier would give officials the option to raise rates sooner.

Back in September, Fed officials were evenly split on raising the rate next year or in 2023. Their fresh quarterly projections will be released at the Fed's next month’s meeting.

The minutes showed that officials anticipate the inflation rate would diminish significantly during 2022, while others feel elevated inflation could be even more persistent.

Meanwhile, President Joe Biden picked Fed Chair Jerome Powell for a second term, following which Powell said policymakers “will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.”

Market Correction Within An Uptrend?

The latest sell-off in risk assets was in part driven by worry over the new variant of the coronavirus during the time of holidays, as such having a heightened effect on the market.

“This is a market reaction/correction within an uptrend,” said Vijay Ayyar, head of Asia-Pacific at Luno Pte., who pointed out that options-expiration days can often be volatile. According to thim, a drop to the $48k-$50k range might be more concerning, and that “20% pullbacks are normal in a Bitcoin uptrend as we’ve seen many times before.”

Ever since the second week of November, when Bitcoin price hit a new all-time high at $69,000, the cryptocurrency has struggled to push higher and has been down 16.6% since then.

On June 20, Bitcoin bottomed at just under $30k and experienced an uptrend into early September only to consolidate here. Then Q4 began on a bullish note right from the first day of October as we went from about $43k to $69k on Nov. 10.

“The market is clearly nervous about the constant selling pressure in spot…Risk reversals also remain convincingly skewed to the downside,” noted QCP Capital.

The selling pressure has effectively capped every rally so far, but the question now is whether it will lead to a downside break. According to QCP Capital, “the market will consolidate instead of breaking lower.”

The market has been weathering the regulatory FUD yet again, but this time in the US amidst the holiday sluggishness, tax selling, equity weakness, and the lack of any narrative right now while the Mt. Gox creditors finalize the rehabilitation plan.

On Thanksgiving, the market did see some strength, though with Bitcoin going to $59,460 and ETH to nearly $4,560 only for the COVID variant to send them lower. Another potential reason for the crypto market’s weakness has been the waning risk appetite in the broader equities market, where profitable tech companies are taking the brunt of the decline.

According to Katie Stockton, founder of Fairlead Strategies LLC, two consecutive daily closes below the $52,900 level would increase the risk of a deeper pullback toward the next support level near $44,200. But that’s not a reason to sell, she said.

“We would hold long positions, for now, given the likelihood of a snapback rally in the days ahead from oversold territory noting intermediate-term momentum remains to the upside.”

Technically, Bitcoin has been trading below its 50-day moving average while Ether has its support present at $4,000.

“It seems to be a battle with the leveraged longs from higher levels getting flushed and the longer-term, more institutional bid below the market,” said Mike McGlone, a commodities analyst at Bloomberg Intelligence.

While during the past few days, Crypto Twitter turned extremely bearish. Interestingly, it can’t be seen in the open interest (OI) as on Bitcoin, it currently stands at $23.43 bln, up from $13 bln in late Sept. and down from $28.85 bln high on Nov. 10.

“Some ppl say majority ct is bearish af, but their tweets isn't where their money is, look at derivs. we've been nuking non stop yet funding cant sustain a negative, spot still can't lead, ponzi forks still going full retord. nuking more most likely,” said trader CL on Sunday.

While some are extremely bearish, money hasn’t stopped flowing into the market, with already $15 billion injected in the first nine months of 2021, up from $3.1 billion in the entire 2020.

“Funds are seeing record inflows of capital, so much so that they can’t deploy quickly enough,” noted Spartan Black, partner at crypto fund The Spartan Group.

This has Jason Choi, general partner at The Spartan Group, expecting a “sector agnostic bear market,” featuring the two-month-long 50% selloff in BTC as seen back in May than a year-long 80% grind.

In short, “market wide + sector-agnostic bear phases that are somewhat quickly recovered as $ realizes there's nowhere else to go but brutal multiple months resets in some sectors as capital flows to other sectors,” he added.

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