Despite Tough Start to 2022, Signs Bitcoin Could Rebound

It's no secret that 2022 hasn't been a great year for Bitcoin so far. The world's largest cryptocurrency has been on a downward trend, with prices down 22.1% since January 1. There are several factors that could lead to a negative trend in the Bitcoin and other cryptocurrency asset markets.

The sell-off in global equities is evidence that investors have begun to favor a more risk-averse approach. The Standard & Poor's 500 index, widely seen as a benchmark for the U.S. stock market, has fallen 5.5 percent since the beginning of the year. The Nasdaq 100, which is much more representative of riskier technology companies, has fallen 10.5 percent in the same period. The downturn is not limited to the United States, as evidenced by the 3.9 percent drop in the Euronext 100 and the 7 percent drop in the Nikkei 225.

Much of this trend away from risky assets appears to be signaled by the Federal Reserve, which says it will begin raising interest rates to fight inflation. On average, respondents to a survey conducted by CNBC expect the Fed to rise 3.5 times this year.

Tensions between Russia and the West related to concerns about a potential invasion of Ukraine could also have a chilling effect on markets.

There is also news specific to cryptocurrencies that could have a negative impact on the market, such as the Russian Central Bank's proposal to ban the use and mining of cryptocurrencies in the country.

In any case, there are still plenty of positive signs that Bitcoin has the potential to turn things around.

1. Bitcoin outflows from exchanges

According to Glassnode, the recent surge in BTC has left the cryptocurrency exchange. In the last week of January, net outflows of BTC from exchanges reached between 45,000 and 59,000 BTC per month.

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Image source: Glassnode

Glassnode's team compared the current pullback in the bitcoin market to a bearish period from May to July 2021. 2021's pullback was marked by a net flow of BTC to exchanges and a reduction in illiquid supply of bitcoin. During the current pullback, the amount of BTC held on exchanges has fallen and illiquid supply has increased.

Typically, BTC outflows from exchanges are seen as a bullish signal, as it indicates that more investors are pulling their tokens back into cold storage (and therefore have no intention of selling in the short term).

2. Long-term investors are still HODLing

The data in the HODL Waves K-line chart shows that BTC that hasn't moved in 3 years or more now represents about 37.6% of the bitcoin supply. During the same period last year, that number was 35%. During the previous cycle peak in December 2017, tokens that hadn't moved in three years or more accounted for 30.5% of the supply. Thus, we can see that investors who see bitcoin as a long-term pledge are owning a growing share of bitcoin supply over time.

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Image source: Chainless Capital

3. Digital asset investment products recorded inflows again

A report released Jan. 31 by cryptocurrency asset manager CoinShares shows that digital asset investment products have seen net inflows for two consecutive weeks. The firm's weekly report tracks products such as grayscale bitcoin trusts, bitcoin ETFs and ETPs, as well as other traditional investment products that give investors exposure to specific cryptocurrencies.

The two consecutive weeks of net inflows broke a streak of five weeks of net outflows. The CoinShares team said the data suggests that "investors are beginning to cautiously add to their positions at these depressed price levels. In the last week of January, bitcoin investment products saw inflows of $22 million. While the number itself is relatively small, the shift from outflows to inflows could signal a shift in momentum in the bitcoin market.

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Image credit: CoinShares

4. According to Willy Woo, comparing BTC prices to on-chain investor demand suggests that Bitcoin is heavily oversold

Willy Woo is a bitcoin market analyst who is known for his predictions based on bitcoin blockchain data. According to a recent tweet from Woo, the relationship between bitcoin prices and on-chain demand as indicated by investors suggests that BTC is at "peak oversold levels. Woo says the metric currently reflects the bottom we saw in October 2020 (when bitcoin started climbing and would eventually break the old highs of December 2017) and the "COVID crash" in March 2020, when BTC bottomed out at around $5,000.

Prices associated with on-chain demand from both speculative and hold category investors are now at oversold peaks.

The last time this happened was in October 2020. The time before that was the bottom of the COVID crash.

Woo's data also shows that bitcoin whales have been increasing their demand for BTC lately.

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Photo credit: Willy Woo