Bitcoin sees its longest winning streak in 6 years. Can he keep going up?

[ad_1]

Text size

If Bitcoin reverses its rally, the dip could be painful due to a lack of liquidity. Dan Kitwood/Getty Images

Bitcoin has seen significant gains over the past week, with the biggest digital asset rising 20% ​​in days to levels not seen since the failure of cryptocurrency exchange FTX rocked the market in november.

But the rally can be built on sand.

Some traders are betting that the rise represents a rebound off the bottom of a bear market, and that the worst is now over for the crypto, which has seen prices fall precipitously by around two-thirds since the all-time high in November 2021.

But other analysts insist on caution. While Bitcoin’s latest jump comes amid positive macro news and a broader improvement in stock market risk sentiment, the Dow Jones Industrial Average and S&P 500 also had a strong start to the year. seems a bit overdone.

Its similar cryptos have completely erased the damage caused by the catastrophic collapse of FTX two months ago, which doesn’t make much sense given that the unprecedented bankruptcy is far from over.

To put the recent rally into perspective, Bitcoin has been up for 14 straight trading days, marking its longest winning streak since March 2017, when the cryptocurrency changed hands around $1,200.

From the perspective of technical analysts, at least, Bitcoin looks overbought. Although big gains give it new higher support levels, that is no reason to continue the rally.

And there’s more reason to think it could unravel soon.

The momentum pushing Bitcoin higher increasingly appears to be the result of a short squeeze similar to the phenomenon that sent shares of GameStop (ticker: GME) soaring amid the early-20s meme trading frenzy. 2021.

The violent upward movement caused pain for traders who bet against Bitcoin with so-called short positions. These trades are made in the Bitcoin perpetual futures market, which is the most liquid of all cryptos. Traders often take short positions with margin or borrowed money, and can be forcibly closed by brokers if the market turns against them. This process, called liquidation, can trigger automatic buy orders, adding pressure to an already rising market.

Soaring spot prices sparked short pressure in Bitcoin markets last week, with hundreds of millions of liquidations recorded as bearish traders were caught on the wrong side of price moves, the vendor’s researchers detailed. of Kaiko Crypto Data in a Monday note. Bitcoin trading volumes also hit their highest levels since FTX crashed in November, although liquidity as measured by market depth has yet to recover.

The latest market depth is the key. FTX was a popular platform among trading firms called market makers, which are key sources of liquidity in crypto. The failure of the exchanges locked up some assets of market makers on the platform, which limited their ability to operate. The collapse of FTX also brought down Alameda Research, one of the largest market makers that was owned by former FTX CEO Sam Bankman-Fried.

The upshot is that crypto market liquidity has taken a hit since November on multiple fronts. When there is less liquidity in the markets, a wave of buying and an absence of sellers can push prices up very quickly.

Short selloffs fueled the entire leg, analysts at crypto exchange Bitfinex detailed in a Monday note. The entire rally was built on the backbone of continued market shorts and prices being pushed higher by ongoing forced liquidations and stops. The move can be interpreted as organic, but it is completely engineered by limited traders in the market, which is evident from the depth of the market.

Even with the leg lifted, the market remains highly illiquid, Bitfinex analysts wrote. We can expect a setback.

Investors beware. In the event of a reversal, a lack of market liquidity will hurt, not help.

Write to Jack Denton at [email protected]

[ad_2]