The cryptocurrency market has been facing downward pressure since the start of the year. According to CoinMarketCap, the total crypto market cap fell 10% in a week to $3.18 trillion.
The downward trend has had a negative impact on inflows and outflows from the cryptocurrency market. According to analyst Ali Charts on X, capital inflows into the market increased from $134 billion to $58 billion in just one month.
This decline indicates a reduction in investment activity. Additionally, traders pulling their money out of the market could indicate market uncertainty and a lack of conviction in short-term price action.
One factor that could be driving the decline amid bullish catalysts such as Donald Trump’s upcoming inauguration is reduced demand for risky assets such as crypto and stocks.
Dollar strength reduces demand for crypto
Trump’s election victory bodes well not only for cryptocurrency prices, but also for the US dollar. According to MarketWatch, the US Dollar Index (DXY) rose to 110, marking its highest level since November 2022.
The US dollar is inversely correlated to Bitcoin in that when the DXY increases, cryptocurrency prices decrease. Additionally, a stronger dollar tends to reduce demand for assets like crypto as investors become risk averse.
Weakening demand is also evident in the crypto exchange-traded fund (ETF) spot market. This is after spot Bitcoin ETFs saw $732 million in outflows over the last two consecutive trading days, according to SoSoValue data. Spot Ethereum ETFs also saw outflows of $185 million last week.
If institutions and retail traders continue to show reduced interest in Bitcoin and altcoins in favor of the US dollar, this could lead to downside pressure.
Fear and Greed Index Shows Market Still in Bullish Territory
Despite the decline in cryptocurrency prices across the market, the Fear and Greed Index, a metric that measures trader sentiment, still shows bullish sentiment.
At press time, this index stood at 61, showing a state of “greed” and that investor demand remained significantly high. However, the level of demand from new buyers has declined significantly, given that the index stood at 78 a week ago.
Bitcoin was trading at $91,690 at press time after a 10% drop in seven days, while the largest altcoin, Ethereum (ETH), was trading at $3,108 after seeing a 14% drop. in a week.
