Bitcoin’s March rally may be petering out. Here's where investors see it going from here

Published Sat, Mar 25 20238:52 AM EDT

Bitcoin held on to its new highs this week and saw the biggest exchange inflows of the year, but the rally could be dwindling, investors say. The largest cryptocurrency by market cap ended the week higher by 3.9% at $27,887, according to Coin Metrics, despite a brief dip following the Federal Reserve meeting. Coin Metrics measures a week in crypto, which trades 24 hours a day, from the stock market close one Friday to the next. Bitcoin has gained 19% in March so far. Ether , meanwhile, ended Friday at $1,764. On a weekly basis it finished up 1.25%, and gained 8.3% for the month. "Not only has crypto outperformed other risk assets as of late, but the stress in the traditional financial system has led to an increased interest in decentralized finance," Citi said in a note this week. "We've seen a rise in search interest for crypto, BTC spot and futures volumes, as well as broader decentralized exchange volumes." BTC.CM= mountain 2023-03-01 Bitcoin in March "Given this week's dovish FOMC, interest in crypto is likely to persist as the market questions whether the Fed can contain inflation," they added. "Bitcoin in particular benefits from the 'digital gold' narrative." Bitcoin's exchange net inflows were the largest of the year and 8.2x larger than the prior week's, suggesting this month's rally was led by retail investors, Citi analyst Alkesh Shah, noted in a separate report Friday. In addition to the inflows, "a rising average daily trading volume into strength indicates profit taking," he said, "but selling from miners, medium-term bitcoin holders (purchased 6 months to 2 years ago) and holders of 10 BTC+ indicates the retail-led rally may be fading." Shah said although investors are moving to the sidelines, escalating market turmoil could drive increased bitcoin volatility. A moment of awareness For much of the past year, bitcoin was widely seen as a risk asset and its price had fallen alongside stocks with each new Fed rate hike. This past month's banking crisis, however, brought a moment of awareness to bitcoin investors that has partly driven the recent rally. Its correlation with stocks is "crumbling," while its correlation with gold is on the rise, Citi said. Bitcoin is "an asset that literally serves the purpose of not needing a bank," said Joe Orsini, macro strategist and author of the "Signal vs. Noise" newsletter. "Fiscal and monetary policymakers were also so quick to backstop the situation and provide confidence, showing growing willingness to spend, a core tenet of bitcoin's investment thesis." Between the banking crisis and new uncertainty around Fed policy, there's a push-and-pull in the bitcoin narrative. Despite the Fed raising rates another 25 basis points this week, which resulted in a brief sell-off in crypto , many in the market expect rate cuts this year and that's caused bitcoin to rally alongside gold. Both assets benefit from monetary easing, Orsini added. "While bitcoin's rally is somewhat extended, the now 40% bounce off the 200-day moving average highlights strength of trend," he said. "Dips have been hard to come by, offering little opportunity to take advantage." What the charts say This week, bitcoin briefly dropped to the $26,000 level, almost returning to the key level of $25,200 chart analysts have been monitoring. Fairlead Strategies said a second close above that level this coming Sunday would indicate a confirmed breakout. "It would be a positive long-term development that would suggest a more lasting turnaround is likely underway," said Will Fairlead. "In the short-term, we expect bitcoin to continue digesting its recent gains," he added. "With resistance [of about $28,200] nearby, it is a natural place for a pause as short-term overbought conditions are worked off." The next resistance comes in around $32,000, marking a consolidation range from May 2022, according to Oppenheimer's Ari Wald. "While the trend is improving following last year's drop, it likely won't be a straight line higher either and trading should remain volatile," he said. —CNBC's Michael Bloom contributed reporting