Bitcoin (BTC) has entered a phase of technical correction, falling to $94,830 after declining more than 12% from its peak earlier this month. Despite this drop, the cryptocurrency has found crucial support at the 50-day moving average, indicating potential resilience in the market.

The pullback occurred during a period of subdued trading activity due to the ongoing holiday season. Data from CoinGecko highlights that Bitcoin's trading volume on Sunday, December 29, was $22 billion, significantly lower than the $41 billion recorded the day before. This is a notable decrease from Friday's volume of $45 billion, underscoring reduced market participation as traders take a break during the holiday.

Under normal conditions, Bitcoin typically has daily trading volumes exceeding $100 billion. Lower-than-average volumes indicate a lack of confidence among traders, which can amplify price volatility during this period.

The impact of federal reserve policy

Bitcoin's recent struggles may partly be attributed to the Federal Reserve's hawkish stance earlier this month. The central bank's modest 0.25% rate cut decision and forecast of only two more cuts by 2025 have dampened market optimism. Previously, the Fed had hinted at the possibility of up to four rate cuts, fueling expectations for more favorable liquidity conditions.

This policy shift has strongly impacted risk assets, including cryptocurrencies, as tighter monetary conditions often reduce speculative investment demand from investors.

Challenges from ETF inflows and strategic reserves

Adding to Bitcoin's challenges is the decline in ETF inflows and waning enthusiasm for the strategic Bitcoin reserve fund. Polymarket data shows that the likelihood of Donald Trump creating such a reserve fund within his first 100 days in office has sharply decreased to 29%, down from a peak of 60% in November.

Meanwhile, Bitcoin ETFs have sold assets in six of the last seven trading days, with a total net asset accumulation of $35.6 billion since their inception, according to SoSoValue. This sluggish performance highlights diminishing institutional interest, adding further pressure to the cryptocurrency.

Could Bitcoin benefit from the January effect?

The anticipated Santa Claus rally, typically seen with assets appreciating before December 25, has not materialized this year. Investors are now pinning their hopes on the so-called January effect — a phenomenon where financial assets appreciate in the first month of the year as market participants restructure their portfolios.

However, historical data provides mixed signals for Bitcoin. Although the cryptocurrency has delivered positive returns in six Januarys since 2013, its performance has varied significantly. For example, it only increased by 0.62% in January 2023 but surged by 39% in January 2022.

Interestingly, February tends to be a stronger growth month for Bitcoin, as the cryptocurrency has only recorded losses twice in its history during this period.

Technical analysis: Key support levels and risks

From a technical standpoint, Bitcoin appears to be at a critical juncture. The daily chart shows that the cryptocurrency is holding above the 50-day moving average and the upward trendline originating from its lows since November 17.

Despite these bullish indicators, the formation of an expanding wedge pattern — often seen as a bearish signal — poses risks. A decisive break below the lower boundary of this wedge could trigger a deeper correction, potentially pushing prices down to $73,777, marking a high point in March 2024.

Conversely, a recovery from current levels could see Bitcoin retest the upper boundary of the threshold at around $110,000, provided strong bullish momentum in the coming weeks.

Conclusion

Bitcoin's recent price volatility highlights the delicate balance between fundamental and technical factors shaping its trajectory. While key technical support levels and the potential for the January effect provide reasons for optimism, bearish patterns and macroeconomic instability could dampen gains. Investors should closely monitor key support levels, ETF inflows, and overall market momentum to gauge the direction of the cryptocurrency as it enters the new year.

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