The new year has not been kind to cryptocurrencies, which rallied on Wednesday despite about a week of selling that briefly took Bitcoin below $40K.
The jittery market started in 2022 on a bad note, with a suddenly hawkish Fed and an Omicron wave of COVID-19 infections sending investors away from risk. Meanwhile, bitcoin hit a new low at $39893.62 – having fallen more than 40% since its November peak.
Bitcoin is down more than 8% at its weakest levels this week, while smaller coins like Ethereum, Solana, Avalanche and Terra are down more difficult. They all recovered on the last day.
Despite Wednesday’s recovery, it’s too early to call a trend reversal in selling given the volume of trading on major cryptocurrency exchanges, Yuya Hasegawa, an analyst at Tokyo-based crypto exchange Bitbank, told Yahoo Finance this week.
After removing the hurdle of Federal Reserve Chair Jerome Powell’s confirmation session for a second term, investors are anxiously anticipating inflation data that will shape sentiment in the near term, with cryptocurrencies almost still trading with technology stocks.
Hasegawa said that Bitcoin’s price range for the rest of the week should be in the $40,000-$48,000 range — but he admitted that “it is definitely not a time for optimism in the short term.”
The start of an interest rate hike, which threatens to siphon off liquidity and tame the once bullish inflation of cryptocurrencies, is frightening. According to data from the Chicago Mercantile Exchange (CME), 72% of market participants expect the Federal Reserve to raise interest rates by 25 to 50 basis points in March.
“Extreme comfort” in the basics of cryptography
Despite the current sell-off, Matt Hogan, CIO of crypto asset manager Bitwise, still believes that the current bear market will not last as long as previous downturns, based on strong user fundamentals that have developed cryptocurrencies over the past year.
Far from speculative activity, Hogan told Yahoo Finance that cryptocurrency adoption has never been higher. There has been a gold rush among small and large crypto investors alike: in particular, venture capital helped raise $33 billion in crypto startups last year.
This funding also explains why developer activity in the sector is at its peak, according to a report last week from Electric Capital. The space attracts more developers when cryptocurrency prices rise. However, according to the report, the number of active developers remains historically constant when prices are falling.
The native tokens of Ethereum (ETH-USD), Polkadot (DOT1-USD), Solana (SOL1-USD) and Bitcoin make up the largest crypto developer ecosystems, with 65% of active developers joining in 2021.
But a December survey by Bitwise found that the percentage of financial advisors setting up cryptocurrency accounts “has risen more than 50% and is expected to continue growing at that pace or faster over the next year,” according to Hogan.
This could be “very comforting” for investors staring at the more hawkish Fed policy in the near term, but could be a plus for later, he added. “This does not mean that there are no further potential downsides at the moment, but it does mean that this is nothing like previous bear markets,” the investor said.
Where will cryptocurrencies settle before bullish momentum returns?
Hogan said higher-growth, first-tier smart contract tokens such as Ether, Solana, Avalanche (Afax-US) and Terra (LUNA-USD) “will work like the Canary Islands in the coalmine in terms of whether and when the downtrend is exhausted.”
David Hollerith covers Yahoo Finance’s cryptocurrency. follow him Tweet embed.
Read the latest financial and business news from Yahoo Finance
Read the latest crypto and bitcoin news from Yahoo Finance
Follow Yahoo Finance on TwitterAnd InstagramAnd YoutubeAnd Facebook social networking siteAnd Flipboard, And LinkedIn