Here's why the bear market in Bitcoin and Ethereum is not over despite Monday's rally

NEW YORK (June 6)  The crypto market was mainly in the green to start the new trading week, with Bitcoin trading well above $30,000 and Ethereum nearing $1,900. But the bear market in crypto is not over, and here are the signs to watch, according to analysts.

The world's two largest cryptocurrencies benefitted from some risk-on sentiment Monday after China relaxed its COVID-related lockdowns. Bitcoin was last at $31,456, up 4.4% on the day. And Ethereum, although off its daily highs, was still at $1,860, up 2% on the day.

"The story this whole year has been one of Bitcoin trading with other risk assets, and today is no different. The market saw the news out of China as favorable as it relates to the reduction of lockdowns in Shanghai. So risk markets got a bid, and Bitcoin, Ethereum and other digital assets followed," Ben McMillan, founder and CIO at IDX Digital Assets, told Kitco News Monday.

However, one critical sign that the crypto space is still in the bear market is Bitcoin miners offloading their long-term holdings to cover rising costs in light of lower prices.

According to Coin Metrics data analyzed by Compass Mining, miners transferred more than 195,000 Bitcoins to exchanges in May, which marked the most significant increase in five months. The total sold was around $6.3 billion based on Bitcoin's average price of $32,000 in May.

"As it relates to the price of Bitcoin, that's contributed to some selling pressure, which has offset some of the long-term buying that we've seen. This is why the price has been trading in this relatively narrow range. It's been kind of a tug of war between miners selling and long-term holders buying," McMillan said.

As Bitcoin trades between $28,000 and $33,000, analysts are not ruling out more selling pressure from miners in June.

"Miners can get away with higher cost electricity when Bitcoin is at $60,000, but when Bitcoin is at $30,000, costs of your electricity and your hardware start to matter a lot more," McMillan explained. "A lot of miners are on the margin and simply can't compete at lower levels of Bitcoin and they might be forced to consolidate or go out of business. The miners that have better technology or cheaper electricity will be able to weather this."

Miner activity has always been of interest when determining bear and bull markets. "The sweet spot has been between $25,000 and $30,000. Much below that, and you start to see significant mining capacity come offline," McMillan added.

This selloff in crypto assets has been a washout event this spring. But the key driver that would mark the end of the bear market would be risk sentiment returning to the marketplace. And this might not happen until September, warned McMillan, noting that this is the time when markets will be looking for signs that the Federal Reserve could be slowing down its aggressive tightening path.

"The key for any kind of sustained price move is more demand coming off the sidelines, and you want to see a positive macro catalyst for prices," he said. "But we still need risk. The reality remains that this macroeconomic environment is still pretty pessimistic. It's all eyes on the Fed to see what path they take, particularly at the September meeting. And quantitative tapering starts this month. Investors are still looking pretty closely at the inflation numbers to see any signs of inflation rolling over."

Markets widely expect the Fed to raise rates by additional 50 basis points at its June and July meeting. The one that could still be up in the air is the September meeting, which will be largely data-dependent.

For Bitcoin investors, there is nothing to get excited about until the price rises above the $33,000 level, said Scott Melker, crypto trader and the host of The Wolf Of All Streets podcast.

"Last Monday, the price had a similar move to the upside, turning many people bullish for no apparent reason. Price is still ranging sideways, under key resistance around $33,000 and above key support at $28,600. A move above or below these levels is worth discussing. Everything else is noise," he said in his newsletter. "We are still very much in a bear market until we make a higher high."

KITCO