Bitcoin has rallied more than 37% since the beginning of 2023 and is on pace for its best monthly return since October 2021.
Analysts have pointed to the weakening dollar, inflation expectations, and institutional buying support catalyzing this rally.
The fading impact from squeezed short positions, as well as troubled firms needing to cash in their profits on bitcoin, make $25,000 the next key price level to watch.
Currently changing hands at $23,000, bitcoin (BTC-USD) is trading at its highest level since August.
And macro investors appear to be leading the rally, according to Noelle Acheson, author of the Crypto Is Macro Now newsletter.
For those investors, "BTC is a [crypto] ecosystem gateway," she said, pointing to the rise in bitcoin’s market capitalization relative to all crypto assets, which has risen to 44% from 41% in past 14 days.
"Bitcoin is an extreme risk-on asset and those assets will do well when interest rates finally begin to fall again," Michael Bentley, CEO of Euler Labs, which operates a crypto lending protocol, said over email.
Year to date, the total market capitalization for cryptocurrencies is up 24% to $1.04 trillion according to Coinmarketcap. On exchanges worldwide, crypto spot trading volume has risen 64% to $4 trillion over the same period, according to crypto indexing platform Nomics.
For bitcoin alone, trading volume has jumped 82% to $1.15 trillion, putting the largest cryptocurrency behind only stablecoin Tether (USDT-USD) as the most traded coin so far this year.
U.S. institutional investors placing bets on bitcoin derivatives have also fueled bitcoin’s strong start to 2023, according to Arcane Research. As Arcane showed in a Tuesday note, buying for bitcoin futures surged on the Chicago Mercantile Exchange (CME) at the beginning of January. Analysts consider crypto activity through the CME to serve as a proxy for U.S. institutional investors.
CME currently accounts for 21% of the bitcoin derivatives market, a level not seen since crypto's all-time peak in the fourth quarter of 2021.
“The technical area people are now focused on is $25,000,” Ben McMillan, founder and CIO of crypto asset manager IDX, told Yahoo Finance. McMillan anticipates “natural profit taking” from hard-pressed firms at this price level.
Surviving bitcoin mining firms, which faced significant revenue pressure over the second half of 2022, have sold 5,600 BTC worth nearly $1.3 billion since Jan. 8, according to analytics platform GlassNode.
The enthusiasm for bitcoin bids could also taper off given how much bitcoin short seller liquidations have contributed to rallies over the past two weeks, according to McMillan.
Since the release of December's inflation report 12 days ago, $1.3 billion worth of short positions on bitcoin have been liquidated, according to crypto derivatives aggregator CoinGlass. As a net of long positions liquidated over the same period, more than $611 million worth of short positions have been squeezed out of the market in that time.
"This looks like it could be the start of a long term uptrend for digital assets," McMillan added. "It's going to be a choppy ride. We’re proceeding cautiously."