Bitcoin’s Price Pauses. Why a Recent Trend Suggests a Big Spike Will Hit Friday.

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Bitcoin
and other cryptocurrencies were largely paused on Friday, holding at levels reached after a recent rally. A recent trend in the crypto options market suggests that a spike in volatility—and possibly a big move upward—could come in the day ahead.

The price of Bitcoin has traded flat over the past 24 hours to just shy of $23,000. The largest digital asset has rallied some 40% in a matter of weeks, enjoying a roaring start to the year that has carried Bitcoin to the highest levels in five months and erased losses that came after crypto exchange FTX’s November bankruptcy rocked markets. Bullish traders are calling it a turning point in the brutal bear market and “crypto winter” that has seen Bitcoin lose two-thirds of its peak value, hitting a multi-year low in November.

“Spikes to $23,700 and down to $22,500 leave their mark on the chart but do not move the market’s balance point. Interestingly, this oscillation occurs with a rising equity market in the background and a moderately weaker dollar, although this environment often feeds demand for risk,” said Alex Kuptsikevich, an analyst at broker FxPro. “Buyer passivity may be a consequence of fatigue after the 44% rally since the start of the year, but it may also reflect an internal pull to sell on the upside.”

A factor spurring Bitcoin’s gains has been a general improvement in risk sentiment, with cryptos gaining alongside the

Dow Jones Industrial Average
and

S&P 500
—a continuation of the correlation between digital assets and stocks. Investors are upbeat that inflation is past its peak and that the Federal Reserve will be less aggressive with interest-rate hikes, which were a key headwind for risk assets last year.

Economic data due Friday could provide another catalyst. The Federal Reserve’s preferred measure of inflation, the personal-consumption expenditures (PCE) price index, will be released at 8:30 a.m. Eastern and is the last major inflation indicator officials at the central bank will see before their next monetary policy decision. 

The Fed’s rate-setting committee will announce what is expected to be an interest-rate increase of 25 basis points on Feb. 1, which would be the smallest rate hike since last June after a series of super-sized 75 basis-point raises and a hike of 50 basis points in December. Investors will want to see more signs that inflation is cooling in the PCE data to firm up bets of this smaller hike and cement a view of more accommodative policy through this year.

But technical factors in the digital asset market have accelerated the recent rally, including low liquidity exacerbating price swings and bullish trading in crypto derivatives, specifically Bitcoin options. And there is reason to believe the day ahead will see more of the same based on a pattern seen this year.

Two of Bitcoin’s latest big leg ups have come on a Friday, with Jan. 13 seeing the jump to $21,000 from $19,000, and Jan. 20 delivering the rise to $23,000 from $21,000. These spikes have been tied to volatility and positioning in the Bitcoin options market, according to Pierino Ursone, the head of options at Deribit, which is a major venue for crypto derivatives trading.

“People are positioning themselves again, we see increasing trading volumes and it looks like the bulls are outnumbering the bears nowadays,” Ursone said. “One more jump will potentially raise Bitcoin volatility even further, however this should happen rather fast, otherwise we might see some more selling pressure.”

Beyond Bitcoin,

Ether
—the second-largest crypto—was 2% lower at $1,575. Smaller cryptos or altcoins were doing better, with

Cardano
1% in the green and

Polygon
8% higher. Memecoins were more muted, with both

Dogecoin
and

Shiba Inu
less than 1% in the red.

Write to Jack Denton at jack.denton@barrons.com