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The crypto market is flashing early signals of a first-quarter recovery as the dust finally settles on December’s sharp sell-off.
According to a new analysis from Coinbase, four structural indicators suggest the correction was a temporary setback rather than a regime shift. Fresh inflows into spot ETFs, a drastic reduction in systemic leverage, improved order book liquidity, and a rotation in options sentiment all point to a stabilizing market.
While traders remain cautious, these metrics indicate the ecosystem is significantly less fragile than it was weeks ago, clearing the path for a potential bounce.
Cautious re-risking via ETFs
The first and perhaps most visible indicator of shifting sentiment lies in the behavior of spot ETFs, which serve as the cleanest gauge of institutional risk appetite in public data.
During the first trading week of the year, US-listed spot Bitcoin ETFs recorded a performance that was barely net positive. The cohort saw two days of strong inflows, which were immediately offset by three consecutive days of outflows, resulting in a net addition of approximately $40 million.
This choppy, two-way flow profile is hardly the kind of steady, relentless bid that typically underwrites a major breakout. However, the magnitude of that two-day flow suggests that current positioning remains highly tactical.
On the other hand, the data for Ethereum paints a slightly more encouraging picture. Over the same timeframe, spot ETH ETFs posted roughly $200 million in net inflows, maintaining a positive balance even after accounting for late-week redemptions.
This divergence is significant because ETH often serves as a higher-beta institutional proxy, a vehicle for investors looking to add risk beyond “just Bitcoin” allocations.
The nuance in these flows tells the broader story of the current market regime. While the return of capital implies that institutions are re-entering the fray, the day-to-day whipsaw in flow data signals that conviction is still coalescing.
For a true Q1 bounce to materialize, the market will likely need to see a regime shift from this erratic activity to multiple consecutive weeks of net inflows.
The leverage reset
A primary catalyst for transforming standard sell-offs into extended market drawdowns is the persistence of elevated leverage, which can “re-break” the market through cascading liquidations.
A key metric for assessing this fragility is systemic leverage, defined as futures open interest relative to market cap.
As of early January, Bitcoin’s futures open interest hovered around $62 billion, while its market capitalization was near $1.8 trillion. This places the ratio of open interest to market cap at approximately 3.4%, a level low enough to argue that the market is not currently over-extended.
Ethereum, however, presents a different profile. With open interest around $40.3 billion against a market cap of $374 billion, ETH’s ratio sits near 10.8%.
This reflects the asset’s more derivatives-heavy structure and implies that, while not automatically bearish, ETH rallies could become more fragile if leverage is allowed to rebuild aggressively.
Nonetheless, the core thesis remains that the leverage wash-out in December has provided a healthier base for price action.
With speculative excess trimmed, the market is theoretically positioned to climb without immediately tripping the kind of liquidation wires that exacerbated December’s volatility, particularly if funding rates remain neutral.
Liquidity and the ‘Clean Slate’
The third pillar of the recovery thesis is market microstructure, specifically, whether order books are robust enough to absorb large flows without causing significant price slippage. Following the holiday lull, this “plumbing” of the market is showing signs of improvement.
Data from Amberdata reveals that Bitcoin’s order book depth within 100 basis points of the mid-price rose to around $631 million, an increase over the seven-day average.
Crucially, spreads remained tight, and the balance between buyers and sellers was nearly neutral, with Bitcoin’s book split roughly 48% bid to 52% ask.
This balance is vital for market stability. In panic regimes, liquidity tends to evaporate, and order books become heavy on the ask side, turning every attempted rally into a wall of selling pressure.
The return to two-way liquidity increases the probability that any upward move can extend beyond a single session.
Additionally, the broader liquidity signal, stablecoin supply, is flashing green. According to DeFiLlama data, stablecoin supply sits near $307 billion, up about $606 million week-over-week.
While the latest increase is small in context, the directional growth is consistent with fresh deployable capital re-entering the ecosystem.
Notably, Binance, the largest crypto trading venue, has recorded net stablecoin inflows of more than $670 million within the past week.
Supporting this is the “clean slate” effect in the options market. A major expiry on Dec. 26 cleared a significant portion of open interest, with Glassnode data highlighting that roughly 45% of positions were reset.
This reduces the risk of legacy positioning “pinning” prices.
Furthermore, the skew, the premium paid for downside puts versus upside calls, has shifted from strongly positive to mildly negative. This indicates that traders are moving away from panic-driven hedging and toward upside participation.
What should we expect from Bitcoin in Q1?
Looking ahead, the options market offers a framework for what is being priced in for the first quarter.
With implied volatility hovering in the mid-40% annualized range, a standard deviation move would place Bitcoin’s expected baseline between $70,000 and $110,000.
Within this band, the analysis outlines three distinct scenarios:
The Bull Case ($105k–$125k): This scenario assumes ETF flows turn consistently positive for weeks rather than days, and order book depth continues to rise to support large spot demand. If skew remains neutral-to-negative and price pushes through the critical dealer “gamma zone,” the rally could accelerate.The Base Case ($85k–$105k): Here, flows remain mixed and leverage rebuilds slowly. Liquidity improves, but lingering macro uncertainty caps risk appetite, keeping options “well-priced” without extreme skew.The Bear Case ($70k–$85k): In this outcome, ETF outflows persist, liquidity deteriorates with widening spreads, and skew snaps back to positive as traders rush for downside protection. A macro shock, such as rising rates or a stronger dollar, would likely force deleveraging.
Ultimately, while crypto can rally on its own internal mechanics, a sustained Q1 follow-through will likely depend on the macro environment.
The early-January setup offers asymmetric optionality: the market is less structurally fragile and increasingly open to upside.
However, until ETF flows stabilize into a reliable trend and macro conditions stop injecting volatility, the “reset” remains a promising setup rather than a guaranteed bounce.
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