Bitcoin’s price tumbled below US$40,000 overnight in Asia for the first time since September 2021. But after dropping more than 5%, Bitcoin recovered rapidly, regaining all ground lost in the past 24 hours to trade at US$41,884 at press time, according to CoinMarketCap.

Ethereum’s Ether, the world’s second-most popular cryptocurrency, followed Bitcoin’s lead and lost 7% around a similar time, briefly dropping below US$3,000 overnight. Ether did not recover as well as Bitcoin, however, and it was down roughly 2% within the past 24 hours throughout most of Asia business hours. ETH was trading at US$3,113 at press time, according to CoinMarketCap.

“There was huge buying interest below the $40K level,” said Igneus Terrenus, head of communications at crypto exchange Bybit, in a statement to Forkast. “The price briefly dipping below the $40K handle filled those bids, bringing fresh reinforcement on the long side, which predictably initiated a mini-rally.”

Terrenus acknowledged the crypto market is facing strong macroeconomic headwinds coming into the new year. The U.S. Federal Reserve recently indicated it would be raising interest rates earlier and faster than expected as the economy continues to recover from the Covid-19 recession. A rise in interest rates typically leads to investors behaving more conservatively as competition for cash heats up.

Concerns also remain around rising inflation. Federal Reserve chair Jerome Powell has reiterated his pledge to prevent current inflation levels from becoming entrenched, according to testimony released before his Senate nomination hearing on Tuesday. U.S. consumer prices rose by 6.8% in November compared to the same period last year, the biggest spike since 1982.

While inflation has typically been seen as a positive factor for Bitcoin, which is increasingly seen as an alternative store of value for gold, this relationship has not been playing out in recent months and may be causing investors to retreat to more traditional assets.

“As the market sentiment remains cautious under macro headwinds, the BTC price may continue to range,” Terrenus said. “If the price breaks above $44K though, there is currently very little resistance on the short side until $46K.”

For instance, November saw the Taproot update go live on the Bitcoin blockchain. This upgrade — the first major improvement to the Bitcoin blockchain in four years — offers greater scalability, privacy and efficiency for the network. Taproot also makes it easier for developers to work on smart contracts and build decentralized finance applications on the Bitcoin blockchain.

“As for the innovation in the Bitcoin space at the back end of 2021, it remains to be seen how that is played out from an adoption point of view,” Miller said. “But there are a lot of potential upsides, just from a technological level for Bitcoin — which means it’s more than just digital gold.”

The crypto market is facing industry-specific headwinds as well. After the approval of two Bitcoin futures exchange-traded funds (ETFs) in the U.S. last year, the Securities and Exchange Commission was expected to also approve a Bitcoin spot-traded ETF. The SEC has proved reluctant to do so, however, as an application by New York-based WisdomTree — among others — was denied in December due to a lack of “surveillance-sharing agreements.”

In the past 24 hours, more than 100,000 traders liquidated over US$340 million worth of crypto, according to CoinGlass, an analytics site. The single biggest liquidation — US$6 million — happened on BitMEX.

“The liquidation ratios on certain coins are relatively high and this is just a sign of the times when you’re in an asset class that can move like crypto does,” said Jonathon Miller, Australian managing director at crypto exchange Kraken. “That can mean even further volatility and that’s perhaps what’s been playing out here.”

Miller also highlighted that while the world’s most popular cryptocurrency is off to a poor start in the new year, the end of 2021 heralded some promising technological innovations that may not yet be priced into the market.

While the crypto market’s sluggish new year start may be disheartening for investors, many remain bullish on Bitcoin — including analysts for Goldman Sachs who recently predicted BTC prices could reach US$100,000 in the next five years.

Miller believes US$100,000 is still a conservative estimate, however, and expresses even greater optimism about Bitcoin’s future.

“If we think about crypto in general, 40K Bitcoin is not a negative level for a lot of investors who have been in the crypto space for some time,” Miller said, taking a long view of BTC’s price action. “Zooming out, we’ve got a trajectory that’s up into the right.”