In short, an overbought market burst in January after months of increasing certainty about the SEC's Bitcoin ETF approvals, allowing for some price correction.
During this time, short-term traders helped push the price higher and then took profits by “selling the news” after the Bitcoin ETF approval.
Finally, tougher macroeconomic conditions with a stronger dollar after a months-long slump have led to more pessimistic sentiment about Bitcoin's overall outlook in January.
Here are a few more details:
Overbought market in Bitcoin ETF news
The cryptocurrency industry was elated after a DC Circuit appeals court ruled in favor of Grayscale last August. The crypto hedge fund's lawsuit claimed that the SEC's decision to reject its Bitcoin ETF proposal was arbitrary and capricious.
The judge ordered the SEC to make a good faith effort to approve an ETF. After that, the Bitcoin price really started to rise in October.
Week after week, new headlines continued to push Bitcoin higher with updates on the progress between over a dozen ETF applicants and the SEC. The average exchange rate on crypto exchanges rose 80% in just over four months, from $25,811 on September 1st to $46,670 on January 10th. The average annual ROI for this would be well over 200%. As JP Morgan predicted, the price had to cool down.
Profit taking by short-term Bitcoin price traders
Some Bitcoin investors follow a long-term strategy of accumulating and holding without selling. They strongly believe that the upside potential in the global cryptocurrency adoption curve is huge and they are reluctant to sell their holdings. But price arbitrage day traders tended to take profits in January.
Antoni Trenchev, co-founder of crypto lender Nexo, says the falling Bitcoin price in January is an example of the “buy the rumor, sell the news” phenomenon in liquid asset exchange markets. A Motley Fool report said: “It appears some short-term traders pushed up the price of the digital currency in anticipation of the recent ETF approvals, then quickly took profits as the euphoria faded.”
Tougher macroeconomic conditions, bearish sentiment
“Over the past two weeks, Bitcoin has been challenged by tougher macroeconomic conditions – evidenced by rising interest rates and a stronger dollar,” Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors LLC, wrote in a recent note.
As analysts at crypto exchange Bitfinex wrote in a note on Tuesday, Bitcoin price fell in January because “a pessimistic mood appears to be prevailing.” They expect key support levels at $38,000 and $36,000 if the correction continues, although Friday's 5 percent rally could mean a recovery is underway.
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