The week started with another escalation in the regulatory crackdown following the shutdown of Kraken’s cryptocurrency staking operations last week on the U.S. Securities and Exchange Commission’s (SEC) demand. The American crypto group Paxos, a key partner to Paypal, was the next victim, forced to halt its issuance of Binance USD stablecoin as of February 21 after an order from the New York Financial department earlier this week.

Traders however, took the news well even though the risk of regulation, which aims to protect customers' funds and avoid an FTX-style collapse, threatens similar shockwaves ahead, with Silvergate Capital being among the struggling firms that might be next in the queue. Despite that, Bitcoin staged an exciting rally up to $25,242 before easing below $24,000 on Friday. The second largest crypto Ethereum moved in tandem to a high of $1,741 before also pulling back below $1,700.

It's not that fundamentals in the crypto economy have improved, but external factors have probably created some room for extra gains. The first bounce occurred when the US CPI inflation figures arrived stronger than expected, reminding investors that a potential pause in monetary tightening could come later rather than sooner, as it may take longer for inflation to slide towards the Fed’s 2.0% symmetrical target. The surprising solid growth in US retail sales came to back that case last Wednesday, suggesting that the US economy is resilient enough to absorb higher rates.

Hence, in an environment of rising interest rates, crypto assets, which have no cash flows to discount and don’t have to be included in portfolios, have probably been considered a better alternative to stocks. That could also justify the moderate increase in the US stock indices, which are now set to finish the week flat.

Perhaps the advance in digital coins would not have happened if there was not abundant liquidity in markets. Although major central banks such as the Fed, the ECB and the BoE are pushing efforts to shrink their balance sheets through bond selling (quantitative tightening), the job is far from done. For instance, the Fed’s balance sheet has eased negligibly to $8.4 trillion from April’s peak of $8.96 trillion, suggesting that the biggest central bank keeps a significant amount of liquidity in financial markets.

But the blame is not only on the Fed. The Bank of Japan (BoJ) and the People’s Bank of China (PBOC) are moving in the opposite direction, stimulating their economies through an accommodative monetary policy. According to research by London's CitiBank, the BoJ has bought more than $475 billion of government bonds since October, while January’s flows were enough to outstrip the total drained liquidity from the Fed, the ECB and the BoE. Yet the stats showed that the ECB and the PBOC had a larger share of the $1 trillion liquidity that was released globally over the last few months.

Recall that government officials in Hong Kong said that the legislative work for licensing virtual asset providers has been completed and will take effect in June. Although the amount of crypto trade is limited in the area and regulatory revisions will continue, that could create more demand for digital coins.

Leaving economic forces aside, it seems that Elon Musk’s tweets on meme coins are still doing their magic, sending Dogecoin 5% up recently after a post of his dog images. Meanwhile, “the Matrix” star Keanu Reeves was the latest celebrity to call cryptocurrencies “an amazing tool for exchanges and distribution resources”.

From a technical perspective, BTCUSD has not violated its nine-month-old range above the $25,000 level yet, while it’s still some distance below the 23.6% Fibonacci retracement of the 2021 collapse seen near $28,000. Therefore, trading could still become choppy, though with the RSI hovering comfortably above its 50 neutral mark and the MACD set to cross above its red signal line, buyers will probably stay in play, especially as the bullish cross between the 50- and 200-day simple moving averages (SMAs) signals that selling interest has reached a bottom and it’s time for an upside reversal.

The aforementioned bullish scenario could lose support if the price retreats below the $23,000 level to test the $21,376-$21,000 region. If the sell-off persists, the next stop could be somewhere between the $20,000 mark and the 200-day SMA.