Market Insights

Cryptocurrencies like Bitcoin and Ethereum pulled back in September. Now analysts may be seeing potentially bullish trends, even with bearishness plaguing the market.

One emerging positive is “big fish” accumulation as large investors move cryptocurrency off exchanges. Strategists including Willy Woo have noted the number of Bitcoin on public platforms like Coinbase (COIN) declined by about 12,000 this month. That’s a sign of holders migrating assets into wallets for longer-term storage. A similar decline in the “liquid supply” occurred in July before Bitcoin rallied.

Next is the growing use of Bitcoin’s Lightning network. Lightning is a peer-to-peer payments system running alongside the main blockchain. Users send crypto through prefunded channels that are reconciled with the main ledger monthly. That allows nearly-instant processing instantly at almost zero cost. Lightning can also route payments indirectly through associates. For example, if two users have channels with a single restaurant but not each other, Lightning can establish a link based on their shared connections with the restaurant.

This overcomes one of Bitcoin’s main drawbacks, slow processing times, while maintaining its security. Lightning’s footprint increased by about 7 percent to 16,000 computers this month, according to Bitcoin Visuals. The system got a big boost in particular from El Salvador’s adoption of Bitcoin as legal tender.

Lightning got another endorsement on September 23, when Twitter (TWTR) enabled payments over its social network. So far the “tipping” feature is only available for iOS users, but CEO Jack Dorsey plans to add Android users in coming weeks.

Bearish Sentiment

These potential positives come at a time of growing caution, with stock market sentiment the most bearish in a year. Alternative.me’s Crypto Fear & Greed Index, which measures price action and social media comments, has plunged from 80 in late August to 20 today. It’s now at the lowest level since the last time Bitcoin bottomed in late July.

At least two regulatory clouds are hanging over the market. One has been China’s renewed crackdown on cryptocurrencies, effectively banning residents from participating in the market. The other is uncertainty about an infrastructure bill in the U.S. Congress that could increase taxes on crypto trading.

While these issues are hurting sentiment, they haven’t been able to push Bitcoin below $40,000 — $10,000 higher than the area where prices bounced in late July. It’s also the top of Bitcoin’s range in late May and mid-June, which could mean old resistance has become new support.

There are reasons to be nervous, given the uncertainty across financial markets. However, things may be near a tipping point where bad news is known and loses its ability to depress prices. Investors may be watching for the pendulum to swing from extreme fear so they can start acting on some of the good news that’s emerged.