Bitcoin, ether on track for positive February despite fading risk rally in 2023

Bitcoin and ether are on track for a modest February win, even after suffering a big drop earlier in the month.

Bitcoin posted a 0.2% gain for the month, according to Coin Metrics. In January, bitcoin posted a 38% gain and its best month since 2021. Meanwhile, ether ended the month higher by 1.7%, following a January gain of 31%.

Investors were spooked earlier this month by what appeared to be the beginning of a potential regulatory crackdown on crypto businesses in the US – including the Securities and Exchange Commission’s enforcement action against Kraken, the Wells Notice of a future settlement against Paxos and the New York State Department of Financial Services orders Paxos to stop minting Binance USD (BUSD) stablecoin.

That led to a short selloff in cryptoassets that took bitcoin and ether down 6% and 8.5%, respectively, in the three-day period ending on February 10. Although they quickly recovered those losses the following week, they have been somewhat quiet since then.

“It’s pretty easy to say the declines are behind us because there’s really nothing dissimilar to resale, but in terms of what’s actually taking us higher — that’s more difficult,” said Jeff Dorman, chief investment officer at Arca.

“Most of the negative news right now comes from regulators, but it doesn’t really have any long-term effect on the market because everything in crypto has perfect substitutes,” he added, noting that when certain crypto companies have been hit by regulators in the past, traders have have always been able to move their activity elsewhere.

As regulatory scrutiny increases in the US, reports emerged this month that Hong Kong plans to legalize retail crypto trading as part of a larger push to become a global crypto hub, with a tacit backing from China. The move has been a positive catalyst for crypto.

In the US, however, investors are on Fed watch, said James Lavish, managing partner of the Bitcoin Opportunity Fund.

“Bitcoin has been the tip of the spear for risk assets for a long time,” he said. “That’s what typically moves first when you’re talking about either buying or selling risk assets as part of your portfolio allocation, and when we actually have a Fed pivot, I expect bitcoin is going to sniff it out first. It’s going to to have a strong feature.”

Dorman is of the opinion that macro events have not gripped bitcoin or the broader crypto market as they did earlier in 2022, before the Terra project collapsed in the spring.

He noted that January was a “great” month for most asset classes, including crypto, following the very negative sentiment investors had at the end of the year. The S&P 500 and Nasdaq Composite posted their best Januarys in four years and 22 years, respectively. Both are on track to end the decline in February.

While this month has been “a complete reversal” overall, crypto wasn’t swept up in it, Dorman said.

“There was definitely a macro overtone to that in the sense that the market started to price peak terminal prices and disinflation numbers, which has been reversed in February,” he said. “In February, digital assets haven’t sold off nearly as much as what you’ve seen from the stock market in the fixed income market.”