Bitcoin Recovers to $21K, Traders Still Wary of Further Rally Due to Recession Fears

Bitcoin BTC$91,219.96 continued the second day of gains on Tuesday to hold over the $21,000 level in European hours in early signs of recovery. The surge came even as traditional financial firms Morgan Stanley(MS) and Goldman Sachs (GS) stated in client notes that recession risks were “not fully priced in.”

“The bear market will not be over until recession arrives or the risk of one is extinguished,” Morgan Stanley said in its note. Meanwhile, Goldman analysts said stock traders were pricing in a mild recession, “leaving them exposed to a further deterioration in expectations,” as per Bloomberg.

Some analysts like FxPro’s Alex Kuptsikevich said bitcoin managed to hold above the $20,000 round level on Monday amid weak trading activity due to the U.S. holiday. Bitcoin ended up “attracting enough speculative demand” to fuel movement in the past two days, he added.

Kuptsikevich remained unconvinced of a continued rally, however. “It will be too early to talk about a long-term reversal: All negative fundamentals remain. Until sharp monetary-policy tightening becomes the norm, financial market pressures can quickly negate bounces in cryptocurrencies,” he told CoinDesk in an email.

Prices of Bitcoin fell below the $20,000 level last weekend in a move that marked a drop below previous highs for the first time in the asset’s history. The dynamics caused a record $7.3 billion in losses for bitcoin holders over the weekend, as reported.

Tuesday’s gains in bitcoin led to recovery among crypto majors. In the past 24 hours, ether ETH$3,100.71 rose 6.4% to $1,130, while Solana’s SOL jumped as much as 15% amid a spike in transactions. Layer 1 tokens like Avalanche's AVAX and Polkadot's DOT added at least 8%, while total cryptocurrency market capitalization rose 5% to $914 billion, as per CoinMarketCap.

The relief, which started late on Sunday, came after volatile trading over the weekend as macroeconomic market conditions remained shaky.

Investor sentiment around risk assets, such as technology stocks and cryptocurrencies, has soured in recent weeks amid rising inflation – and a hawkish Federal Reserve has caused concerns of prolonged economic contraction.

U.S. Federal Reserve Chair Jerome Powell hiked rates by 75 basis points last week, the highest raise in over 28 years as the agency remains committed to combating inflation.

But broader equity and index markets saw a relief rally following Powell’s comments that he did “not expect moves of this size to be common."

Meanwhile, crypto market observers remain wary of the current relief in crypto markets.

“Everybody kind of feels that Bitcoin needs to wash out and take out all the short positions,” said Chris Terry, vice president at lending platform SmartFi. “This would be probably the full 80% retracement, which is typical in the markets, which would be down in the $12,000 to $13,000 range.”

Lily Zhang, chief financial officer at crypto exchange Huobi Global, said the group remained “long-term bullish on crypto” but showed concerns in the short run.

“Our market indicators show that there is an unprecedented level of fear, uncertainty and doubt in the market,” Zhang said. On-chain liquidations may trigger a cascade of drawdowns as the market sees a large wave of capitulations.”

Zhang added that such dynamics could, however, allow crypto-focused investors to take advantage of a possibly “undervalued market.”