Can The Upside for Cryptos Continue

The strong rally in the crypto space from the start of the year seems to have petered out. What happened, and is there a chance of a revival?

Winds of Fed's Pivot

Bitcoin seemed to be one of the biggest winners of January optimism, as the stock market rose and there was a growing risk appetite. By the end of the month, institutional investors were coming back into the crypto market after beating a hasty exit in the wake of the FTX scandal. At the time, there was increasing speculation that the Fed was close to a pause in the rate hike cycle, and there could even be a reversal with the Fed cutting rates soon.

Looser monetary policy is considered an essential backer for higher volatility assets, which have characterised crypto. The shift in tone by the Fed following the last meeting, hinting that only a
couple of more rate hikes would be necessary to control inflation, helped support risk appetite. With high inflation, crypto's selling point as an alternative to fiat currency might continue to gain traction, despite the relative volatility.

Market Reactive to Risk

Inflation is expected to come down this year, either because of the Fed hiking, a recession, or both. The correlation between risk appetite and crypto (particularly BTC) was further illustrated after reaching its most recent peak on Friday. The release of unexpectedly strong jobs numbers opened the possibility that the Fed might hike more than expected. Subsequently, Fed's Powell
acknowledged this when asked directly about the jobs numbers.

Investors are now trying to figure out if the better jobs numbers imply the US will avoid a hard landing or if that means the Fed will tighten more than expected. The former case represents a risk-on opportunity. But the latter appears to be the course the crypto market took, as it has been on the backfoot this week. More clarity on economic growth and when the Fed might stop hiking could help reduce some hesitancy to jump back into the crypto market and provide a boost.

Bitcoin in Correction

BTCUSD appears in a correction mode, with a flag-like pullback expected to complete the downward leg above $18370. Losing the swing will expose the low of $15480 again, opening the door to deeper territories as a reversal would be confirmed instead. Above there lies the 20k handle. If bulls defend the said base, Bitcoin could see an upward leg to the previous high of $24250 and attempt $25200 for a then larger correction. But only if the top succumbs will there be a chance at the 30k handle.

Key Takeaways

Cryptocurrencies have seen a surge in January due to the Fed hinting at fewer rate hikes, but the narrative changed after the latest jobs report. Inflation is expected to come down, which could influence the direction of the crypto market depending on whether better jobs numbers imply a soft or hard landing. BTCUSD is currently in correction mode, with the possibility of a larger correction if it fails to defend the 20k handle. More clarity on economic growth and when the Fed might stop hiking could help reduce hesitation and boost the crypto market.