This week, a sudden rally took place, pushing the price of BTC up to $24,200. It's eased back slightly to around $23,200 at the time of writing, but that's still up just over 11% from the start of the week.
Bitcoin is not the only cryptocurrency reversing the recent downtrend. The reversal of Ethereum, the number 2 cryptocurrency behind bitcoin, was even stronger. He took advantage of the announcement of the date set for the merger to bounce back.
This is the network's long-awaited transition from a proof-of-work consensus mechanism to a less energy-intensive proof-of-stake mechanism.
READ ALSO: 8 Indicators That Precede A Bitcoin Low.
What are the reasons for the sudden increase in Bitcoin?
Many attribute bitcoin's rebound this week to investor optimism that inflation can be brought down. On July 14, Federal Reserve Governor Christopher Waller said the market had “gotten a little carried away” with talk of a 1% rise. Since then, optimism has crept in that the Fed's tightening will not be as severe.
The rally is largely due to the markets feeling they have a good understanding of Fed policy, hikes, and quantitative tightening.
Explains Mr. Kaufman, head of the market strategy at trading firm TheoTrade. “The strong correlation between stock markets and bitcoin remains significant.”
Other factors come into play. In recent months, multiple crypto funds and leveraged firms have gone bankrupt, leading to a wave of liquidations in the space that has accentuated the price drop.
Matthew Liu, the co-founder of Origin Protocol, a decentralized finance and NFT platform, said that “the rise in bitcoin is mainly due to the removal of leverage in crypto.”
Over the past few months, we have witnessed the collapse of the Terra blockchain and the insolvency of major crypto firms, such as Celsius and Voyager, as well as crypto hedge fund Three Arrows Capital.
“ These companies and systems were all interconnected. Their fall was widely reflected in the market. Now that these irresponsible leveraged behaviors have been somewhat eliminated from the system, some market participants are venturing into a risk-on mode,” Mr. Liu added.
Bitcoin volatility
Volatility and bitcoin go hand in hand, but this week's price rebound has also been accompanied by a drop in volatility. Indeed, the 30-day metric has fallen from 75% to 50% in the past seven days.
It remains high, however, and bitcoin's volatility is known for its sudden jumps. With the geopolitical climate remaining extremely unpredictable and investors on their guard, there is no guarantee that this trend will take hold. Liu says:
"Volatility should be significantly lower than in May and June when we saw catastrophic corrections in bitcoin and ethereum. There will still be short- to medium-term turmoil and unpredictability, but deep corrections that lead to mass capitulation are largely over."
What does this rebound mean for investors?
The big question plaguing investors is whether this is a sign that Bitcoin has bottomed or whether the safe haven is just a dead cat bounce – where prices temporarily rebound amid a longer-term negative trend, only to resume their fall.
According to analysts, the market is waiting for the next Federal Open Market Committee (July 26 and 27) and will avoid major movements until then. This seems to be the consensus opinion at present.
While the rebound has brought a welcome respite, and while the catastrophic wave of sell-offs is unlikely to repeat itself on the same scale, the geopolitical climate, runaway inflation, and the Fed's stance on interest rates leave, however, there is considerable uncertainty.
Even under the best conditions, it is almost impossible to predict the short-term price development of digital assets. This is especially true in this market environment.
Even though this price rise represents a welcome refuge for investors, bitcoin is still down 52% on the year, having started 2022 at just over $46,300. It is even worse if we compare the current price to its ATH of almost $68,800 reached in November 2021.
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