Crypto market opens the week with a pullback, but analysts say not to worry

Cryptocurrencies pulled back Monday, erasing some of the gains posted last week. Despite this, bitcoin and ethereum managed to stay above key levels.

Bitcoin lost around 6.5% over the past 24 hours at time of publication, posting an 8% decline from its highs last week that saw the token soar past $44,000 for the first time since April 2022. The largest cryptocurrency was still trading above $40,000 on Monday.

Ether similarly declined, losing more than 7% over the past 24 hours Monday afternoon in New York, but managing to hover around $2,200.

“It looks like this is a leverage adjustment, which can be painful but is usually good news,” Noelle Acheson, author of the “Crypto is Macro Now” newsletter, said. “Last week, signals from the crypto futures market were starting to suggest that leveraged speculation was getting heated. We can see this in the funding rates, which are what traders pay to take long or short positions in crypto perpetual futures.”

Digital asset investment products last week posted their 11th straight week of positive inflows, with more than $43 million pouring in between Dec. 3 and Dec. 9. This was a decline from prior weeks, however last week saw a “notable increase in short position inflows due to recent price appreciation and perceived downside risks,” researchers from CoinShares said Monday.

“Bitcoin remains the primary focus of investors, seeing $20 million inflows, bringing year to date inflows to $1.7 billion,” CoinShares analysts added. “While short-bitcoin saw $8.6 million inflows, presumably as a proportion of investors see the current price rises as unsustainable.”

Monday’s pullback aside, bitcoin and ether are still slated to close out the year far into the green. Bitcoin (BTC) is currently up close to 150% year-to-date while ether (ETH) is up more than 80% since the start of 2023.

Analysts say markets were due for a correction, and this week’s Federal Reserve rate decision could push traders back into a risk-on mindset. As of Monday afternoon, futures markets were calling for a close-to-100% chance of no rate change from the Fed, according to CME Group.

The European Central Bank is slated to update its interest rates Tuesday and the Bank of England is scheduled to release its December meeting summary and minutes Thursday.

“While we think the US Fed (as well as the ECB and BoE) will keep the door open to further tightening, if needed, we believe the underlying tone and the Fed’s updated economic projections should reinforce views the next move will probably be a cut with the interest rate ‘dot plot’ potentially revised lower,” analysts from Corpay wrote in a Monday note. “In our opinion, this type of ‘dovish’ tilt coupled with a softening US inflation and retail spending pulse could exert downward pressure on the USD.”

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