While bitcoin sees signs of life after a month of dashed hopes, experts warn it may be too early to call a resumption of the broader bull run.
The cryptocurrency reached 2 1/2-week highs above $40,000 early Tuesday, having found bids near $36,000 over the weekend after Tesla CEO Elon Musk said the carmaker could resume bitcoin transactions should miners meet environmental standards.
Some observers see Musk's comments as massively bullish because they show that concern over the negative environmental impact of mining that was partly responsible for May's 35% drop are transitory. Others are cheering El Salvador's decision to adopt bitcoin as legal tender.
However, macro and crypto-specific factors including the impending U.S. Federal Reserve meeting, bitcoin's dominance rate and technical charts warrant caution on the part of the bulls.
Let take a look at these factors in detail.
The Federal Open Market Committee (FOMC) is scheduled to meet on Tuesday and Wednesday to discuss policy. Fed Chairman Jerome Powell will hold a press conference following the meeting at 2 p.m. ET on Wednesday.
While the central bank is likely to keep key policy tools unchanged, some analysts are concerned the bank may strike a slightly less dovish tone in the wake of rising inflation.
"While we think that most Fed members will be determined to keep interest rates on hold until they see signs of a sustained increase in prices, we also expect a handful of voting members to upgrade their interest rate projections over the forecast period," Matthew Ryan, a senior market analyst at the global fintech and FX risk-management firm Ebury, said.
"This is likely to result in a median dot that shows hikes before the end of 2023 versus the March projections that signaled no hikes until 2024," Ryan said.
According to crypto finance service provider Amber Group, there are some concerns the Fed may discuss the timeline for paring down, or tapering, the liquidity-boosting emergency stimulus launched a year ago. That's evident from the pre-Fed weak tone in gold, copper, and other commodities, as noted by Bloomberg.
Any hint of early tapering or a rate hike could trigger risk aversion in financial markets, killing the nascent bitcoin recovery. Alternatively, a strongly worded commitment to keep the tap open would bring cheer to bitcoin and asset prices in general.
Prominent investors like Barry Silbert, co-founder and CEO of Digital Currency Group (CoinDesk's parent company), expect a pickup in the equity market volatility after the Fed meeting. Some of that could feed into the bitcoin market. "I've gone long the VIX to prepare for the macro fireworks," Silbert tweeted Monday, referring to the Cboe Volatility Index.
"Fundamentally, we still see downside risk [for bitcoin] associated with a correction in the extended U.S. equities and downside risk associated with regulatory headwinds," Joel Kruger, a currency strategist at LMAX Digital, said.
Bitcoin's dominance rate
A sustained uptick in bitcoin's dominance rate – the top cryptocurrency's share in the total market capitalization – is needed to confirm a trend reversal higher.
That's because the largest cryptocurrency by market value is usually the first to rally, followed by alternative cryptocurrencies (altcoins). In other words, money enters the crypto world through bitcoin, as seen in October 2020, and moves to altcoins.
The dominance rate remains below 50% at press time, having peaked above 70% in early January, according to TradingView. According to analysts at JPMorgan, that bitcoin's share is still quite low is a bearish sign.
"We believe that the share of bitcoin in the total crypto market would have to normalize and perhaps rise above 50% (as in 2018) to be more comfortable in arguing that the current bear market is behind us," JPMorgan analysts led by Nikolaos Panigirtzoglou said in a note published June 9.
Matthew Dibb, co-founder and COO of Stack Funds, said he expects bitcoin's share in the crypto market to rise in the coming weeks. "With the rotation from altcoins to bitcoin, as well as the imminent purchase of large tranches of Bitcoin by MicroStrategy, we may see the dominance rate grind higher in the next few weeks, while altcoins lag."
Key resistance still intact
While bitcoin has charted an impressive relief rally to $40,000, it has yet to clear key price hurdles that could pave the way for bullish revival.
"Ideally, for us to call a bottom we would like to see a weekly close above $41,000," Stack Funds' Dibb said.
Simon Peters, a crypto asset analyst at multi-asset investment platform eToro, also cited $41,000 as the level to beat. "We've seen the price face resistance earlier in the year at this level when it was trading around what was then an all-time high, and I would need to see a stronger increase to feel optimistic about the price recovering and possibly pushing onto $50,000 and beyond," Peters said in an email.
Bitcoin briefly topped $41,000 on Monday before falling back to under $40,000, CoinDesk 20 data shows.
While Dibb and Peters are watching $41,000, social media chatter suggests some in the investor community are focused on the 200-day simple moving average (SMA) hurdle, currently lined up at $42,604.
Per Pankaj Balani, CEO of Delta Exchange, the recent recovery from lows near $30,000 might be a short-term respite. "The bounce might extend to $45,000 levels, but upside looks limited here, and we expect to see more selling come through at those levels," Balani said in a WhatsApp chat.