Analysts Highlight Key Factors Driving Bitcoin's Surge To Year-To-Date High

The unstoppable price rally of Bitcoin started a few weeks back and led to the king of crypto hitting a new year-to-date high Monday. But what caused the world's largest crypto asset by market cap to surge and break through the $42,000 price threshold?

A report from Bitfinex Alpha attributed the surge to "a culmination of various factors, including a notable shift in the dynamics of the futures market compared to the spot market."

Analysts at Bitfinex, through their Cumulative Volume Delta, said that the increase in leverage and the decline in open interest, especially on the short side, played a significant role in Bitcoin's rally. Additionally, the futures market's ability to withstand downward pressure contributed to the continued upward movement.

"In our analysis of Cumulative Volume Delta, we saw an increase in leverage – usually a sign to exercise caution – but simultaneously a decline in open interest, especially on the short side," the report said.

Moreover, the analysts observed heavy buying in the futures market, which erased shorts in both Bitcoin and Ethereum markets, further increasing the upward pressure.

"Further, the futures market was showing resilience on downswings, compared to much more muted activity in the spot market. Heavy buying in the futures market also wiped out shorts across both BTC and ETH markets, further contributing to upward pressure," the Bitfinex Alpha report read.

"Positive BTC price dynamics are also taking place against a backdrop of strong economic data, underpinned by a rebound in US consumer confidence. That said, there are some signs of stress in the banking sector, which has seen a decrease in profits due to rising loan provisions and unrealized investment losses," it stated.

The report, however, advised investors to approach with caution, despite Bitcoin's current trading position above the seven-year Realized Price bands and the supporting levels for the asset. It highlighted a concern regarding a breach in the three-year Realized Price, signaling a risk of a potential market capitulation.

"While these phenomena are driving the price upwards, we show that the downside risk should not be ignored. BTC is now trading above the one, two, three, five and seven-year Realised Price bands. While these levels are now effectively providing support for BTC, we see that a breach of the three-year Realised Price, in particular, poses a risk – albeit remote – of market capitulation," the report said.

"This upward movement can be attributed to a combination of factors. Notably, there was significant buying activity in the market, particularly aimed at absorbing the supply above $37,500, near the upper boundary of its recent trading range," a Bitfinex analyst said in a note sent to International Business Times.

"On December 1st, BTC was still hovering below the range high. Cumulative Volume Delta (CVD) for the futures market, which measures BTC's mid-to-long-term buy and sell pressure, by comparing buying and selling volume over time, was seen to be more resilient on downswings on the lower time frames as compared to the CVD for the spot markets," the analyst explained.

"As a result, the market was in a state of 'perp premium' which implies a high relative difference in demand for BTC in the futures market, compared to the spot markets. While this may be seen as a signal to exercise caution in other contexts, as more leverage in the markets is not always healthy, what was notable was that at the same time, open interest declined," the analyst added.

Bitcoin, after briefly hitting the $42,000 price level, slowly climbed down and was trading in the green zone at $41,907.03 as of 1:45 a.m. ET on Tuesday with a 24-hour trading volume up by 58.27% at $35,472,642,498.

BTC's price action represented a 0.96% spike in the past 24 hours and a 13.2% gain over the past seven days.

Data from CoinMarketCap showed that BTC's circulating supply still stands at 19,561,437 BTC while its value continued to climb by 0.98% at a $$819,748,181,609 market cap.