Bitcoin (BTC) failed to sustain its recently reignited northbound movement ahead of the monthly close on Tuesday. The modest retracement came against a cumulating positive sentiment around the asset since the start of the year. Still, the flagship cryptocurrency sealed January in fashion with 39.63% monthly returns compared to Ethereum (ETH), whose price rose 32.44% during the same period. The welcomed green monthly came as a relief following a series of negative monthly closes in November and December.

Crypto market gives away weekend gains

BTC price slipped below $23K coming off the weekend, but the flagship crypto has reclaimed and tried preserving active trading around the price mark. The leading crypto asset has continued trading steadily above this range on Wednesday, with traders and investors alike focused on the Federal Open Market Committee (FOMC) decision anticipated later this afternoon.

BTC/USD 3-week chart. Source: TradingView

The crypto market is expected to embrace more volatile albeit short-term action driven by the reaction to the news from the US Federal Reserve.

Macroeconomic data preoccupies traders

For the most part, investors worry about a return on the bear market. Specifically, market strategists are watching the outcome of FOMC, which could be a source of volatility for many reasons. Top among them, market players look forward to hints that might drop about when the Fed's lasting stance to hiking interest rates could end or even out.

GDP numbers beat the forecasts, though economic growth slowed down

Leading up to this week, market metrics generally looked favorably on Bitcoin. Real gross domestic product (GDP) numbers of Q4 beat expectations, even though economic growth slowed – an increase at a 2.9% annualized rate, rather than the anticipated 2.6%, but lower than Q3's 3.2%. Wednesday's meeting is expected to be fairly uneventful but the comments delivered to the press by Chair Jerome Powell afterward could trigger some reaction in the market. The general expectation is that the Fed will hike interest rates by 25 (quarter) basis points in today's meeting. The quarter bps increase follows a 50 basis points increase in December. This expected deceleration in the size of the hikes would be the smallest increase since March last year, but that does by no measure mean the market's reaction is any definite.

Probability of FOMC rate moves. Source: CME FedWatch Tool

The tone of the Fed's messaging is also worth watching as strategists contend that the Federal Reserve will seek to keep up with its efforts against inflation. Some expect that Chairman Jerome Powell's remarks might show an inclination for just a further 25 or 50 basis points for the rest of the year. Notably, a decision in line with the Fed sticking to an hawkish stance will likely result in suppressed markets.

Market Watch

Following the price retracement across the board, Bitcoin and some altcoins have consolidated near their previously established zones. Crypto market participants have remained calm for the most part in the face of the prevailing erosion of gains. The 24-hr. chart shows Bitcoin has reclaimed $23,000, but a repeated failure to maintain ground above this mark could mount pressure on eager traders to book minor profits if spooked by the Fed Chairs' comments. In this case, sellers could look at the $23.5K resistance for reference.

Bitcoin trades on multiple narratives

Derivatives and on-chain data suggest the market is picking up and there is more room for movement on either side as the market is yet to overheat. While the biggest concern around altcoin traders has been the debate on profit taking, heads in the Bitcoin and Ether ponder whether a bullish cycle is emerging or the surge is but merely part of a bull trap.  For comparison to Wall Street, the S&P 500 and the Nasdaq Composite indices traced 6% and 11% monthly returns in January. The Ark Innovation ETF (ARKK), on the other hand, saw its best month in history, with a roughly 30% increase across the 31-day period.

Meanwhile, correlation with the S&P 500 has dropped fairly in the last two weeks from 0.89 on Jan 11 to 0.69 last week. That with tech-heavy Nasdaq Composite, though, has remained high, around 0.89 in the wake of mass staff layoffs in both sectors. The stablecoin supply ratio (SSR), which defines the ratio between the supplies of bitcoin and stablecoins, has also popped up as a trending factor in recent days that traders ought to keep on their radar. Stablecoins are crucial instruments in the digital assets ecosystem as they facilitate crypto transactions and are viewed as a representation of buying power.

Altcoins spotlight

A dip below $1,000 for Ethereum (ETH) is unlikely, considering recent bullish milestones in the Ethereum ecosystem. Ethereum  turned deflationary, in the second half of Jan, as reflected in its issuance and burn rate figures. In addition to a recent deflationary impact, the network has tracked steady adoption among hands since September 2021, seen in the number of Ethereum addresses holding non-zero balances, whose count reached a record 92.5 million earlier this month. The latter achievement sets Ethereum on the path to hit 100 million non-zero address wallets as soon as Q2 if the current adoption rate remains the same. Another narrative worth closely following next month is the upcoming Shanghai upgrade which has also already influenced the liquid staking DeFi niche. The hype around the hard fork, which will enable staked ETH withdrawal, could likely contribute to volatility in Ethereum prices ahead of its tentative March timeline.

ETH, ADA, and MATIC returns in 2023. Source: TradingView

Polygon's MATIC, on the other hand, has increased by 15% in the last seven days. The MATIC/USD pair cleared crucial resistance at $1.05 last week on its way to its highest level thus far  this year. Market data shows the pair peaked marginally below $1.20, close to the level prior to the FTX collapse. In anticipation of today's decision, bullish holders failed to build upon the momentum which has seen the token price slide marginally below $1.10. Elsewhere, Cardano (ADA) which has taken the spotlight among alts this week, is trading at $0.3826. APT, the native token of the layer one blockchain Aptos has cooled off after staging a terrific run last week and is currently changing hands at $16.27. Still, the APT token is up approx. 400% since Jan 1.

Projections

Economist Lyn Alden contends that it would be imprudent to presume that an upward trend in interest hike will continue unabated. She said the Federal Reserve's decision regarding managing liquidity conditions in the US would have a significant hold over what's to come of Bitcoin's apparent recovery. Alden reckons that Bitcoin's positive trend might not persist due to the influence of US legislative bodies and the Federal Reserve System. The economist expects the low point of Bitcoin to be gradual and says its value is closely linked to improving liquidity conditions since the last quarter of 2022.

As far as Bitcoin's recent upward surge goes, Alden recalled that the FTX-Alameda debacle had a detrimental effect on the overall sector in the latter part of Q4, despite the positive performance of other assets, such as equities and gold. Presently, it seems that Bitcoin is recovering from the impact of the collapse and reverting to its anticipated trajectory had the FTX issues not been there. She added that these favorable liquidity conditions stem from the US Treasury's efforts not to breach the debt ceiling, thereby infusing liquidity into the financial system.

The Federal Reserve holds the cards this week

Ark Invest CEO separately posited that once the debt ceiling matter is resolved, the Treasury will replenish its cash balance, leading to a withdrawal of liquidity from the financial system. At that point, both the Treasury and the Federal Reserve will simultaneously bite into liquidity, creating a potentially risk-on environment for Bitcoin. The star stock-picker is optimistic that the Fed will pivot soon, pointing her prediction to various indicators of lower inflation, indicating that the Federal Reserve should make a change soon. In the recent video blog, she explained that the market is anticipating a signal from the Federal Reserve, which will likely come in the first half of 2023.

Holders remain anxious about price drivers

Though a price catalyst could bring back $25,200 – the next immediate resistance after $23,500 – in focus for bullish traders across the short and medium terms, the possibility of larger strides above these August levels remains low considering the potentially compromising liquidity conditions projected to influence market course in the second half of the year.

Reserved participants consider the current scenario a bear market short squeeze. The increase in open interest from institutional investors and other asset managers indicates that the recent positive sentiment could remain durable. Volume, however, doesn't support the rally, which is the fundamental argument for analysts cautioning against a trap.

To learn more about Bitcoin, check out our Investing in Bitcoin guide.