Why did bitcoin rise above $20,000?
By Dmytro Litvinko 599 23 Jan 2023
Over the past few days, the cryptocurrency market has been showing steady growth, and bitcoin has gained a foothold above the $20,000 mark. What fueled this growth?
A couple of weeks ago, many traders were sure that bitcoin could drop to $14,000. But, as often happens, the price went against expectations, and we saw a reversal.
Now bitcoin, for the first time since the FTX exchange crash, is worth more than $20,000. There were at least several reasons for such growth. Let's take a look at each of them.
Reducing inflation and the US Federal Reserve’s softened rhetoric
The US inflation data was released on January 12. The annual rate fell to 6.5 percent. This matched the forecast and allowed bitcoin to rise above $19,000.
Also, growth was facilitated by a change in the rhetoric of the US Federal Reserve System (FRS), which had previously been hawkish. Now representatives of the Fed began to declare that the increase in interest rates could stop at 5 percent. Only 50 basis points remain before this value, indicating that the Fed will soon stop curbing inflation. You can read how this affects the price of bitcoin in our article.
Stock market growth
Recent years have shown that the cryptocurrency market correlates with the global economy and the US economy. When the US authorities decided to turn on the printing press in 2020, it provided the necessary "fuel" for the stock market's growth, followed by the crypto.
This time, the stock market also showed a slight increase due to positive inflation data: the S&P 500 index rose by more than 3% in a few days, approaching the psychological mark of $4,000. As a riskier and more volatile asset, bitcoin showed a stronger recovery.
Cascading liquidation of "bears"
In total, the crypto market sentiment was bearish. That was indicated by the fear and greed index, negative news, and technical analysis indicators.
In anticipation of positive inflation data, experienced players counted on the fact that the price had already considered the forecast. Therefore, the rule "buy the rumor, sell the news" would work. Many short positions were put up and eventually liquidated since the market maker pushed the bitcoin price slightly higher than traders expected. Stop losses began to work, resulting in a chain reaction to buy out bitcoin. The total amount of liquidations exceeded $725 million.
Undervaluation of bitcoin
The MVRV Z-Score indicator helps to determine whether an asset is over- or undervalued compared to its "fair value". Since the second half of last year, this indicator has been in the lower range, indicating that bitcoin does not live up to its "fair value". We were in this range for quite a long time, so we should have expected that the situation would soon change and growth would ensue.
MVRV Z-Score is calculated by the difference between the market cap and realized cap of an asset.
Correlation with the previous bitcoin cycle
Many cryptocurrency market experts believe that bitcoin is cyclical; each cycle lasts about 4 years. If you look at the chart of the main cryptocurrency throughout its history, you can see that this is indeed the case.
The previous phase of the bear market lasted for about a year, after which we saw a good rise in 2019. At that time, bitcoin did not repeat the previous bull run success, but the growth was still quite significant. Approximately the same amount of time has passed in the current bear market, indicating a connection with the previous cycle.