3 Key Reasons Bitcoin Struggles to Rally Above $28.5K

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22 Jan 2024

Introduction:

Bitcoin has recently shown signs of a potential rally, briefly reaching $28,600. However, it failed to maintain momentum and break through the $30,000 level. This article explores three significant factors that have been hindering Bitcoin’s upward movement and influencing investor sentiment.

Macroeconomic Forces Exerting Downward Pressure:
The first factor affecting Bitcoin’s price is the macroeconomic landscape. U.S. Federal Reserve Vice Chair for Supervision, Michael Barr, expressed concerns about a potential economic slowdown due to higher interest rates restricting economic activity. The uncertainty surrounding the Fed’s interest rate decisions and the lingering impact of current monetary policies create a sense of caution in the market. This uncertainty is reflected in the CME FedWatch tool, which shows a divided market regarding the possibility of another interest rate hike in 2023. Additionally, rising real yields on U.S. 10-year Treasuries, reaching their highest levels in 15 years, have bolstered the U.S. Dollar Index. The U.S. economy is viewed as a relatively attractive investment destination compared to Europe and China, further affecting Bitcoin’s performance.

2. Bitcoin Trading Metrics Show Diminished Activity:
Bitcoin’s trading metrics reveal a lack of enthusiasm among traders. Bitcoin monthly futures typically trade at a premium to spot markets, suggesting that sellers demand more money for delayed settlement. However, the BTC futures premium remains below the 5% neutral threshold, indicating a lack of demand for leveraged long positions. Furthermore, spot trading activity on traditional exchanges has dropped to levels not seen since late 2020, indicating reduced participation by institutional investors. This decline in trading volumes can be attributed, in part, to major U.S.-based trading firms distancing themselves from the cryptocurrency markets due to increased regulatory scrutiny, making the market less appealing to institutional investors.
Bitcoin 2-month futures annualized premium. Source: Laevitas
Bitcoin daily spot trading volume, USD. Source: Messari and Kaiko
3. Diminished Expectations for a Spot BTC ETF:
Investor expectations for the approval of a spot Bitcoin Exchange-Traded Fund (ETF) by the U.S. Securities and Exchange Commission (SEC) have played a role in Bitcoin’s recent performance. Despite Bitcoin’s impressive 68% gains in 2023, the launch of Ether futures-based ETFs on October 2nd generated lackluster demand. Additionally, the Grayscale Bitcoin Trust, which was expected to convert into a spot Bitcoin ETF following a favorable court ruling, continues to trade at a 19% discount compared to its Bitcoin holdings. This discount reflects a lack of confidence among investors in the approval of a spot Bitcoin ETF, as they would have the option to redeem their shares at par value upon conversion.

Conclusion:

In summary, Bitcoin faces several challenges in its attempt to rally above $28.5K and break through the $30,000 resistance level. Macroeconomic forces, diminished trading activity, and reduced expectations for a spot Bitcoin ETF approval are key factors contributing to Bitcoin’s struggles. As a result, the short-term prospects for surpassing this resistance level appear uncertain, and investors are closely monitoring these dynamics in the cryptocurrency market.
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Written by Shantanu Gupta

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