The year has been mostly rough for the crypto market, and investors were already getting used to the status quo. However, Bitcoin made a comeback recently, rising close to $35,000 and taking the rest of the market with it.
The comeback wasn’t sustained though, even though Bitcoin has managed to stay above $34,000 for the last few days. This has raised questions on whether or not the rally will be sustained.
According to some analysts, the rally has a good chance of being sustained because of the rising liquidity that is seen in Bitcoin.
Bitcoin’s liquidity has been on the rise for the past four months, something the analysts say could result in Bitcoin’s sustained recovery.
Traders are more confident when there is increased liquidity because they are confident there will be someone on the other side of the world willing to buy from them when they are ready to sell. For Bitcoin, this means more investors are willing to buy the asset for sale later.
According to Bitfinex analysts, this is welcomed by high ticket traders and institutions, “who prefer an asset class which can provide exposure and exit without high spreads.”
Another analyst and Falcon X Head of Research David Lawant agrees with this position. “The early liquidity signs of this rally are encouraging,” Lawant said in a note, adding that strong liquidity trends are an important signal to confirm that the current price recovery is sustainable.
“With the potential for more favorable liquidity conditions going forward, I’m excited about the current crypto market prospects,” he added.
Bitcoin is currently in its third week of a sustained upward trajectory, which began in mid-October. However, YouHodler Chief of Markets Ruslan Lienkha said the current liquidity levels must not be taken as a sign of a sustained period of strength for Bitcoin.
“We noticed an uptick in liquidity in the crypto market but it is not possible to say at the moment if it is the beginning of a new upward trend or just a correction in a few-year-long period of capital outflow from the crypto market,” Lienkha told The Block.
Indeed, Bitcoin has seen significant inflow in the past month, with its market capitalization increasing by $140 billion. Bitcoin-based funds have also seen net inflows of almost $410 million within the past month.
“If we talk about the whole crypto market, I think the current level of liquidity is somewhere close to the April 2023 level. If we talk specifically about bitcoin, it might be at a 1.5-year high but just because of a kind of cannibalizing of the token market due to the steady increase of bitcoin share in the market,” Lienkha added.
What is Fueling the Liquidity?
There is an increasing confidence in Bitcoin shown by the massive liquidity flowing into it, but what could be fueling this confidence?
One possible explanation is the increasing probability of a Bitcoin ETF getting approval in the U.S. Several ETF applications have been submitted, and just like in past years, decisions on them have been delayed.
However there’s high hopes that at least one of the applications will be approved. Some analysts even believe that multiple applications will be approved, and this could be directly contributing to the net inflows seen.