3 Things To Consider Before Calling Bitcoin's Revival

While bitcoin is showing 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 concerns 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 Federal Reserve (Fed) meeting, bitcoin’s dominance rate, and technical charts warrant caution on the part of the bulls. 

Let's take a look at these factors in detail.

Fed fears

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. 

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 taper or rate hike could trigger risk aversion in financial markets, killing the nascent bitcoin recovery. Alternatively, a strong-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, expect a pick-up 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. 

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.

It looks pretty likely bitcoin's dominance would increase in the coming weeks as there is a lot of rotation from altcoins to bitcoin.

Key resistance still intact

While bitcoin has charted an impressive relief rally to $40,000, it is yet to clear key price hurdles that could pave the way for bullish revival.

Analysts are expecting to see a weekly close above $41,000 before calling a bottom, with some even waiting to see it break as high as $45,000 before concluding that a full-blown recovery is in play.

Bitcoin briefly topped $41,000 on Monday before falling back to change hands around $40,000, according to data from coinmarketcap.com.