On Tuesday, Bitcoin reached a high of over $23,000, marking a significant increase since the start of the year. Despite concerns about the sustainability of this rally in light of last year’s market downturn and subsequent false rallies, a report from Bankless suggests that there may be reasons to believe that this current surge could continue.
According to Bankless, one of the reasons that the current rally in the crypto market may be sustainable is that there is little evidence to suggest that the market is over-leveraged. In 2022, there was a major de-leveraging event as centralized infrastructures failed, which eliminated a large portion of leverage. Additionally, open interest in perpetual futures has seen a significant decrease. Even large players in the DeFi space, known as “whales,” were not found to be significantly over-leveraged. Therefore, for another market downturn similar to the one experienced during FTX and the COVID-19 pandemic to occur, an external shock would be necessary, as there is currently only $164 million in liquidated ETH positions across lending protocols such as Maker, Aave, Compound and Liquity.
Another factor that suggests the current rally in the crypto market may be sustainable is the positioning of investors and traders. According to data, investors are currently holding a large portion of their assets in cash.
Additionally, large whale portfolios show that 25% of their assets are held in cash, which, although lower than the peak of 40%, is still at a historically elevated level. This suggests that investors have not yet fully allocated their assets and have room to push prices higher. Additionally, a decline in stablecoin from $142 billion to $136 billion suggests that there is still a significant amount of capital available to enter the market.
Furthermore, given that crypto assets are sensitive to changes in liquidity in the wider financial market, any loosening of financial conditions could be a bullish sign for crypto prices.
In conclusion, the current rally in the crypto market, led by Bitcoin and Ethereum, may be sustainable due to little evidence of over-leveraging, positioning of investors and traders, and the decline in stablecoin. As always, it’s important to do your own research and invest wisely.