A Bitcoin Santa Claus rally is unlikely, according to both chain and derivatives data

With the arrival of the coldest days of the crypto winter, speculative investor interest in the cryptocurrency market has dropped to pre-2021 levels, dampening the chance of a significant directional price move. However, there is a possibility of a bear market rally similar to the bullish trend from July to August 2022.

The market enters a state of limbo

The FTX implosion affected more than 5 million users globally and negatively impacted many crypto companies it was exposed to. The industry is currently in recovery mode, which US-based crypto market broker Cumberland recently echoed in a tweet. a company pointed out that “dozens of crypto companies are either being severely downsized or out of business, and the future for the industry is as cloudy as ever.”

The data suggests that building a sustainable upward move will be challenging as the market is being pushed back into a low liquidity and volatility regime.

Crypto-analytics firm Glassnode has reported that futures volumes for Bitcoin (BTC) and Ether (ETH) have “fallen”, returning to pre-2021 levels when the Bitcoin price first topped $20,000.

The volume of open interest for Bitcoin and Ether futures has fallen significantly towards mid-2022 levels, which were after the collapse of Luna-UST. The BTC and ETH leverage ratio index, which measures the ratio between the volume of open interest, is currently down between 2.5% and 3.1%.

Bitcoin spot trading volumes on cryptocurrency exchanges have also fallen significantly towards their lowest levels in 2020. Data from Blockchain.com shows that the seven-day moving average of the exchange’s trading volume fell to $67 million, compared to $1.4 billion near 2021 bull market peak.

With low liquidity and a cloud of market uncertainty, there is a strong possibility that the bear market is not over yet. Bitcoin’s realized volatility has also fallen to two-year lows of 22% (one week) and 28% (two weeks).

Going forward, volatility may remain subdued, with more sideways moves or slower downward price action. However, there is still a chance of a bear market rally in the short term.

Is the bitcoin price pump and dump in action?

The shakeup from FTX in November was similar to the implosion of LUNA-UST seen in June, and these events usually cause panic selling, making an asset attractive to bargain hunters looking to buy into capitulation.

Thus, a short-term bullish rally that may last a few days or weeks takes effect, which is exactly what happened in July and into August when the price of Bitcoin rose towards $25,000. Based on the vibration levels from November and signs of institutional buying, Bitcoin may be going through a similar bear market rally.

A measure of realized profit and loss for long-term owners has fallen towards an all-time low, indicating potential oversold conditions. Long-term holder losses reached similar levels only during the lows of 2015 and 2018.

In addition, the futures market is currently in a tailspin, which means that there are more open short positions than long positions. Throughout Bitcoin’s history, similar conditions only lasted for short periods of time and ended up in a short-term pump to squeeze short orders.

The backlog trend between institutions and whales, which had been negative for most of this year, turned positive in mid-November. The increase in holdings by these investor groups provided a tailwind for the bear market’s rally in the third quarter of this year.

CoinShares reported that institutional Bitcoin investment vehicles saw a total inflow of $108 million after the FTX crash, with $17 million added last week. Notably, the current inflows are much lower than the 25th and 35th weeks of this year, which has caused an upside move towards $25,000.

On-chain data from Glassnode also shows positive accumulation among Bitcoin whales, which are identified as addresses containing greater than or equal to 100 BTC (worth about $1.7 million at current prices).

While these whales’ holdings increased from yearly lows in a similar manner in July-August, the BTC price has yet to reflect this positive addition.

Technically, the support and resistance levels of the previous trading range between $18,700 and $22,000 could form the local highs of the current impulse. Conversely, if BTC builds support above $22,000, the bear market rally could become more significant as the bullish trend continues.