Bitcoin Defies Wall Street Inflation Selloff, Adds Gains as Cryptocurrencies Plunge

Bitcoin Defies Wall Street Inflation Selloff, Adds Gains as Cryptocurrencies Plunge

The highest US inflation in 40 years ignited a fire under Bitcoin (BTC-USD) on Thursday, extending a rally that undid some of the damage caused by the “crypto winter” selloff.

The sector has been rocked by the threat of an interest rate hike, which the Federal Reserve is set to do as early as next month. Still, Bitcoin chuckled, diverging from stocks in volatile trading after news that January’s inflation rate had climbed 7.5% annualized, the highest since 1982.

Bitcoin was broke after the data but added more than 2% on the day to trade comfortably above $45,000, even as other coins like Ethereum (ETH-USD), Cardano (ADA- USD) and Solana (SOL-USD) lagged. Fundstrat noted that while January sellers appear exhausted, they “have yet to see sustained demand” for “blue chip” cryptocurrencies like Bitcoin and Ether.

Yet, according to Michael Safai, Managing Partner at Dexterity Capital, a proprietary crypto-trading firm, Bitcoin has now gained support above $43,000 from the bulls, which has risen on the resurgence of the crypto market.

Until very recently, there was a close correlation between tech stocks and cryptocurrencies. Safai told Yahoo Finance that this link is a key driver of the crypto resurgence, following a months-long rout in which Bitcoin halved in value after hitting a record near $69,000 – falling to a low of $33,500 on January 24.

On Wednesday, Bitcoin’s correlation with the Nasdaq (^IXIC) and the S&P 500 (^GSPC) remains high (between 0.84 and 0.85) while its connection with gold is almost non-existent (0.02) according to block search.

More importantly, Safai explained that unlike previous episodes of volatile trading, “we are not seeing a ton of sell-offs on the derivatives side of the crypto market.”

A key leading indicator of changing investor sentiment, the derivatives side of the crypto market shows that longs and shorts are taking a beating.

Of the more than $291 million in positions liquidated in the past 24 hours, just over half (59%) were long positions. Meanwhile, since 10 a.m. ET on Thursday, the number of short positions has been cascading, at a rate of 83% of total liquidations, to a total of at least $34 million according to the crypto data provider, coin glass.

Higher interest rates will likely hurt the outlook for stocks and, in theory, cryptocurrencies. Still, reading some of the market’s top tea leaves, the outlook isn’t entirely clear, according to Noelle Acheson, head of market intelligence at prime crypto-asset broker Genesis Trading.

Long-term holders, or wallet addresses holding BTC for a time-weighted average of more than 5 months, now hold over 80% of the total circulating supply of Bitcoin according to Coin Metrics. Historically, these investors have been more likely to buy than sell when markets turn.

However, on a 30-day rolling basis, long-term holders now appear to be net sellers according to Acheson’s analysis.

On the other hand, short-term holders of BTC (around 20% of wallets holding BTC) acquired the asset in a short period of time. They still seem to shape the dynamics of the asset as a risk asset, “which remains a very volatile investment thesis,” Acheson added.

David Hollerith covers cryptocurrency for Yahoo Finance. follow him @dshollers.

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