In the last 24 hours, the world’s largest cryptocurrency by market cap, Bitcoin (BTC), experienced a sharp and sudden reversal in price momentum. The price fell below $24,000 after reaching $25,100. Ethereum (ETH), the second-largest cryptocurrency by market cap, mimicked this downtrend in BTC. What happened, and why did we see a reversal in prices on February 23? Why is BTC still tethering on the $23,000+ level? Read on to find out!
BTC price
At the time of writing, the BTC price is at $23,895, with a $26 billion trading volume in the past 24 hours and a slight increase of 0.88% in price during the same period. According to data from CoinMarketCap, BTC holds a live market capitalization of $461.8 billion, a circulating supply of 19,300,650 BTC coins, and a maximum supply of 21,000,000 BTC coins.
Industry participants see two possible scenarios for BTC’s price action. In the first one, more losses are expected for BTC all the way down to what is called a demand zone, a zone between $22,000 and $22,500. If BTC reaches this level, it is believed that the buying pressure will propel the prices back to $25,000 again.
The second scenario would see bullish sentiment taking over, where prices will shoot up to $25,000 and test a resistance area of $25,300. With a break above that level, it is believed that price increases for BTC would continue.
BTC/USDT price analysis. Source: TradingView
However, despite technical factors that can influence the price action of BTC and other cryptocurrencies, more “fundamental” factors play a role in the price action. More specifically, various macroeconomic factors sway the broader markets, not just crypto. Let’s take a look at some of these factors.
US GDP data
One of the primary reasons why the bullish momentum we have seen in BTC in February looks as if it’s about to fizzle out is the expectations of the US preliminary gross domestic product (GDP), and personal consumption expenditures (PCE) figures, which will most likely increase market volatility. Furthermore, the Federal Reserve (Fed) February meeting minutes, released on February 22, are another contributing factor causing investors to pull back from risk assets.
The general fear is that the Fed will remain hawkish and continue its fight against inflation by raising rates. Over the past 6-months, the broader markets sea-sawed back and forth thanks to an approach of aggressively raising rates to stifle inflation. When rates are raised, the liquidity in the markets is reduced, which often prompts investors to pull out their funds from riskier investments. Moreover, if the inflation data keeps hovering or increasing from the levels seen in January, we may see more downturns in crypto markets.
A different look
It is important to note that BTC has had a 45% rise since its 2022 price of $16,529. The fact that the price action is being rejected by bearish investors at $25,000 could raise concerns among investors, but there is also a different way of looking at this situation. Namely, the Fed’s inability to curb inflation while raising rates to its highest level in 15 years is one of the reasons why BTC rallied by 45%.
Also, the cycle of ever increasing rates cannot go on forever, it is predicted that once the debt-to-GDP ratio surpasses 128, the next 18 months will see the Fed changing its tune. Keep in mind that predicting what the Fed might to is almost impossible, but some historic data point to the period mentioned above.
Meanwhile, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency encouraged US banks that rely on funding from crypto to keep up strong risk management policies to prevent the possibility of a “bank run.”
Options and margins
Professional traders can often be found in the margin markets, which they use to borrow cryptocurrencies to leverage their positions. Taking a look at these professional markets can give us, retail investors, a better insight into how professionals see the next period playing out. In these markets, stablecoins can be borrowed to buy (long) BTC. Meanwhile, BTC borrowers can only bet against (short) BTC. These markets, unlike futures markets, don’t always match the longs and shorts.
The current margin lending ratio increased over the past few days, indicating that professional traders are adding leverage to long positions, despite BTC breaking down below the $24,000 level. Tracking these margin lending levels over the next few days will be interesting since it may be a precursor to BTC’s price movement.
BTC margin lending ration. Source: OKX
Options markets are also used to analyze the price action of both stocks and cryptocurrencies, to understand if traders are more risk averse. If market makers are looking to overcharge for upside or downside protection, some alarms should be going off in traders heads. This increase is usually measured by a 25% delta skew. In general, skew metrics above 10% indicate that traders fear a price crash, while a negative 10% skew indicates euphoria regarding the price action.
Currently, the skew data is hovering around -5%, indicating a healthy balance between the bulls and the bears.
To sum it up, derivatives data shows an excessive margin demand for longs and a neutral risk assessment by options traders when it comes to BTC. These levels do not seem overly risky for investors; however, they’re not too bullish either, indicating that over the next few days, we may see some sideways movement in crypto markets unless troubling data or developments occur.
Conclusion
Considering that we have seen a lot of pressure from the regulators on the crypto space, as well as numerous lawsuits, we could argue that the entire crypto sector is holding up well. It also seems that the regulatory pressure will continue, as evidenced by a recent interview by Agustín Carstens, the general manager of the Bank for International Settlements, who underlined the need for more regulation and better risk management in the crypto sector.
We would not argue against more regulation, though it tends to have a negative impact on the price action. However, with the developments surrounding the collapse of FTX, and last week’s Platypus DeFi hack, more protection is needed for small investors, and that can only be achieved through more regulatory supervision.
All in all, the price of BTC and other tokens is fairly stable, despite a sharp downturn in the past few days; for the year, BTC is up over 43%, which is a nice gain for anyone that had bought in at the beginning of the year when BTC lingered around $16,600 levels. For everyone else, the sharp decline may have been worrying, but the data shows that it might be only temporary, though in crypto, predictions are the hardest thing.
