Cryptoverse: Big investors are returning to Bitcoin

By Medha Singh and Lisa Pauline Mattackal

(Reuters) – Big investors are diving after a record month for Bitcoin back into crypto waters.

Digital asset investment products, which are often favored by institutional investors, saw inflows of over $117 million last week, the biggest weekly increase since last July, according to data from asset manager CoinShares.

Bitcoin was by far the biggest attraction, with funds tracking it being responsible for $116 million of it. Total crypto fund assets under management have risen to $28 billion, up 43% from November, when the collapse of the FTX exchange sent shockwaves through the industry.

“Most people are more confident than they were a month ago,” said Joseph Edwards, investment adviser at Enigma Securities.

Bitcoin, the original cryptocurrencyis up almost 40% in January, setting its best monthly performance since October 2021 and its second-best January in the last 10 years.

The rally, combined with a potentially brightening macro picture, has some investors hoping that the long crypto winter could finally be close to spring. Many investors are expecting the US Federal Reserve to hike interest rates by 0.25% this week – the smallest hike since the start of its tightening cycle last year.

“If peak inflation is indeed behind us for now, then long-term interest rates could move lower as we near the end of the inflationary tightening cycle,” analysts at Fidelity Digital Assets wrote.

“This could signal positive momentum on the macro front for assets like Bitcoin.”

Activity in the options market indicated traders were looking to place bets shortly after the Fed meeting, a sign of the importance the market is placing on it, said crypto liquidity provider B2C2.

Crypto trading volumes are also rising, according to CoinShares, with average weekly volumes up 11%, suggesting traders are returning after months of subdued activity.

Still, crypto is far from over the hill and the Fed could still spoil the party if it adopts a more aggressive tone this week.

The Bitcoin Fear & Greed index Crypto data platform Coinglass — with 0 indicating extreme fear and 100 indicating extreme greed — is hovering at 61, its highest level since mid-November 2021, just after bitcoin began retreating from its peak.

“We could see a drop in the next week or two, but how deep that drop goes is debatable,” Edwards said.

Bitcoin “dominance”

Still, according to analysts at exchange Bitfinex, there are other signs that the end of the bear market may be near. They said that shorter-term investors were selling their bitcoin at a profit, while longer-term “HODlers” were still holding on to their coin and are not contributing to the selling pressure.

“Realized gains and losses for the overall market were posted as positive in January 2023 for the first time since April 2022, a continuation of this trend would signal the end of a bear market,” they said.

Additionally, Bitcoin’s “dominance,” or share of the overall crypto market, has moved around 41% this month, a level not seen since last July. Analysts at Citi said this mimics a similar leap in bitcoin dominance in April 2019, when a bitcoin rally marked a bottom in the crypto market.

Other market watchers said that stocks, another relatively risky asset class, are likely to drive bitcoin prices over the next week, particularly the performance of interest-rate-sensitive tech stocks.

Bitcoin’s correlation with the Nasdaq stands at 0.94, its highest since May 2022, with a measure of 1 indicating the two are moving in lockstep.

In late November, Bitcoin broke its bonds with stocks and traded with a negative correlation of 0.7.

“It is possible that Bitcoin could reach the next resistance level of $25,200 in the coming weeks,” said Rachel Lin, CEO of exchange Synfutures. “Even if bitcoin ends up going back down, there is a good chance it will make a higher low on a larger timeframe.”

(Reporting by Lisa Pauline Mattackal and Medha Singh in Bengaluru, Alun John in London; Editing by Pravin Char)