Market Wrap: Cryptos Stabilize, Analysts Expect Bitcoin Short Squeeze

Cryptocurrencies are starting to stabilize after falling in January, and some analysts expect prices to recover this month, especially as several alternative cryptocurrencies (altcoins) outperformed bitcoin over the past week.

Bitcoin was roughly flat over the past 24 hours, versus a 2% gain in ether (ETH) and a 10% gain in SOL over the same period. Metaverse tokens such as MANA and SAND failed to sustain Monday's rally as both tokens declined as much as 5% over the past 24 hours.

On Tuesday, Indian Finance Minister Nirmala Sitharaman announced a 30% tax on any income from the transfer of virtual digital assets, a first for the nation. "India is finally on the path to legitimizing the crypto sector in India," said Nischal Shetty, co-founder and CEO of WazirX, one of India’s largest crypto exchanges. The announcement didn't trigger a significant market response.

Analysts expect regulatory headwinds to fade over the short term, which could boost investor sentiment. For example, the crypto Fear & Greed Index is starting to rise from extreme lows, indicating more bullish activity. And in the bitcoin futures market, there are signs of a pending short squeeze, which occurs when prices unexpectedly rise, forcing short sellers to exit positions.

For now, some buyers continue to return on dips. MicroStrategy (Nasdaq: MSTR), the software company that’s taken to accumulating bitcoin, said it bought about 660bitcoins for about $25 million between Dec. 30 and Jan. 31.

Technical indicators suggest a possible rise in BTC could be limited at the $40,000-$45,000 range as long-term momentum weakens.

Latest prices

●Bitcoin (BTC): $38587, +0.35%

●Ether (ETH): $2775, +3.35%

●S&P 500 daily close: $4546, +0.68%

●Gold: $1801 per troy ounce, +0.31%

●Ten-year Treasury yield daily close: 1.80%

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.

Improving sentiment

The crypto Fear & Greed Index rose from "extreme fear" territory last week, which means bearish sentiment has started to fade. The index is now near its July 2020 lows, which preceded a recovery in crypto prices.

"On Sunday, the index briefly hit 30 - the highest level in 2022," Arcane Research wrote in a Tuesday report. Still, some analysts prefer to see an increase in trading volume to confirm a shift from bearish to bullish sentiment.

"Bitcoin is currently fighting with the $40,000 resistance, and if it manages to break it, we might see a similar volume explosion as when it dropped below this level. Until then, trading activity might be muted as momentum traders often wait for specific price action before making directional bets," Arcane Research wrote.

Possible short squeeze

Bitcoin will need to make a decisive break above $40,000 in order to trigger short liquidations. The chart below shows the recent decline in long liquidations, which typically precede short liquidations (or a short squeeze) as the price of BTC recovers.

Liquidations occur when an exchange forcefully closes a trader’s leveraged position as a safety mechanism due to a partial or total loss of the trader’s initial margin. That happens primarily in futures trading.

"With high negativity, elevated leverage, and an overall short bias, a reasonable argument could be made for a potential counter-trend short squeeze in the near-term," Glassnode, a crypto data firm, wrote in a recent blog post.

Altcoin roundup

• Litecoin’s pivotal MWEB upgrade is now released: David Burkett, the lead developer behind Litecoin’s Mimblewimble Extension Block (MWEB) upgrade as a "RC" (release candidate), has confirmed that MWEB has now been officially released, following an intense multiyear process of development, testing, reviewing and auditing, along with the help of dozens of key contributors. Once miners receive the completed code, they may begin signaling for MWEB activation right away. Once a threshold is met, the activation date will be locked in, and as a result, MWEB will go live. This release comes after Quarkslab, a respected security and code auditing company, completed a review/audit of the MWEB code. Litecoin’s LTC token was up 5% over the past 24 hours. Read more here.
• ‘Pay’ product on Solana: Cryptocurrency’s original use case – payments – is getting a boost on the Solana blockchain. New software co-developed by Solana Labs intends to help merchants accept crypto payments over the Solana network. Checkout.com, Circle and Citcon are supporting “Solana Pay,” which made its debut on Tuesday with integrations with crypto exchange FTX and ecosystem wallets Phantom and Slope, according to Danny Nelson. Read more here.
• Wonderland founder tries to wrap things up: On Monday, embattled developer Daniele Sestagalli took to Discord to answer questions from the Wonderland protocol community – a rancorous 45 minutes featuring big promises and bluster, but few specifics on how the project will move forward on leveraging its $325 million treasury to deliver value for token holders.

Relevant news

• Hester Peirce Warns Proposed SEC Reform of Securities Trading Platforms Could Threaten DeFi
• ConsenSys Acquires Ethereum Wallet MyCrypto, Plans to Merge It With MetaMask
• Alexis Ohanian’s VC Firm to Focus on Crypto With $500M Capital Raise: Report
• PsyOptions Acquires Tap Finance for Undisclosed Sum

Other markets

Digital assets in the CoinDesk 20 ended the day higher.

Largest gainers:

Asset Ticker Returns Sector Solana SOL +12.5% Smart Contract Platform Litecoin LTC +5.0% Currency Ethereum Classic ETC +4.8% Smart Contract Platform

Largest losers:

Asset Ticker Returns Sector Filecoin FIL −1.7% Computing Chainlink LINK −1.1% Computing

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.