With the end of the December sell-off, the crypto market is showing early signs of a first-quarter recovery.
According to new analysis from Coinbase, four structural indicators suggest the correction is a temporary setback rather than a regime shift. New inflows into spot ETFs, a significant reduction in systemic leverage, improved order book liquidity, and a rotation in options sentiment all point to market stabilization.
While traders remain cautious, these indicators show the ecosystem is much less vulnerable than it was a few weeks ago, paving the way for a potential rebound.
Be careful with risk with ETFs
The first, and perhaps most visible, indicator of a change in sentiment is the movement of spot ETFs, which serve as the most accurate measure of institutional investors’ risk appetite in public data.
In the first trading week of this year, the US-listed spot Bitcoin ETF posted a marginally positive net positive performance. This cohort saw two days of significant inflows, which were immediately offset by three consecutive days of outflows, resulting in a net increase of approximately $40 million.
This choppy two-way flow profile is different from the steady, relentless bidding that typically underwrites large breakouts. However, the magnitude of the flow over those two days suggests that current positioning remains highly tactical.
Ethereum data, on the other hand, paints a slightly more positive picture. During the same period, the Spot ETH ETF recorded net inflows of approximately $200 million and remained positive even after accounting for redemptions later in the week.
This distinction is important because ETH often acts as a high-beta institutional proxy and a vehicle for investors looking to add risk beyond their “just Bitcoin” allocation.
The nuances of these flows tell the broader story of the current market regime. The return of capital suggests that financial institutions are re-entering the fray, but the daily flogging of flow data shows that confidence is still consolidating.
For a real recovery in the first quarter to materialize, the market will likely need to see a shift from this volatile activity to several weeks of consecutive net inflows.
Reset leverage
The main trigger for turning a standard decline into a long-term drawdown in the market is a sustained increase in leverage, which can “re-break” the market through a chain of liquidations.
A key metric for assessing this vulnerability is systemic leverage, defined as futures open interest relative to market capitalization.
As of early January, Bitcoin futures open interest was hovering around $62 billion, and its market capitalization was nearly $1.8 trillion. This leaves the open interest to market capitalization ratio at around 3.4%, a level low enough to argue that the market is not currently overextended.
However, Ethereum presents a different profile. The open interest is approximately $40.3 billion against a market capitalization of $374 billion, and the ratio of ETH is nearly 10.8%.
This reflects the asset’s derivative-heavy structure, and while not automatically bearish, it does suggest that the ETH rally could become more vulnerable if it can actively re-leverage.
Nevertheless, the core theory remains that December’s leverage washout provided a healthier basis for price action.
With speculative excess reduced, the market is theoretically positioned to move higher without the kind of liquidation wire that exacerbated December’s volatility falling any time soon, especially if funding rates remain neutral.
Liquidity and the “blank slate”
The third pillar of the recovery theory is the market microstructure, specifically whether the order book is robust enough to absorb large flows without causing large price movements. After the Christmas holidays, this “plumbing” of the market is showing signs of improvement.
The depth of Bitcoin’s order book within 100 basis points of the mid-market price rose to about $631 million, above the seven-day average, according to data from AmberData.
Importantly, spreads remained tight and the balance between buyers and sellers was near neutral, with the Bitcoin book split at approximately 48% bid and 52% ask.
This balance is essential for market stability. In a panic regime, liquidity tends to evaporate, the order book becomes heavy on the sell side, and any attempt at upside turns into a wall of selling pressure.
A return to two-way liquidity increases the chances of bull markets extending beyond a single session.
Additionally, the stablecoin supply is flashing green, a broader liquidity signal. According to data from DeFiLlama, stablecoin supply has reached nearly $307 billion, an increase of about $606 million from the previous week.
While recent increases are small in context, the direction of growth is consistent with newly deployable capital re-entering the ecosystem.
Notably, Binance, the largest crypto trading venue, recorded net stablecoin inflows of over $670 million in the past week.
This is evidenced by the “blank slate” effect in the options market. The large expiry on December 26th wiped out a significant portion of the open interest, with Glassnode data highlighting that around 45% of positions were reset.
This reduces the risk of price ‘pinning’ due to traditional positioning.
Additionally, the skew, or the premium paid for downside puts and upside calls, changed from strongly positive to slightly 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 provides a framework that is priced into the first quarter.
With implied volatility hovering in the mid-40% annualized range, standard deviation movements would place Bitcoin’s expected baseline between $70,000 and $110,000.
Within this scope, the analysis outlines three different scenarios.
- Bull Case ($105,000-$125,000): This scenario assumes that ETF flows consistently turn positive over weeks rather than days, and that order book depth continues to increase to support large spot demand. The rally could accelerate if skew remains neutral to negative and prices break through the gamma zone, which is important for dealers.
- Base case ($85,000-$105,000): Here, flows remain mixed and restructuring is slowly exploited. Liquidity improves, but lingering macro uncertainty dampens risk appetite and keeps option prices “fair” rather than overly biased.
- Bear Case ($70,000-$85,000): As a result, ETF outflows continue, liquidity worsens as spreads widen, and skew returns to positive levels as traders scramble for downside protection. Macro shocks such as rising interest rates or a strong dollar will likely force banks to deleverage.
After all, cryptocurrencies may rise based on their own internal mechanisms, but the continued achievement of the first quarter may depend on the macro environment.
The early January setting offers an asymmetrical option. In other words, the market is not structurally fragile and there is increasingly more upside room.
However, until ETF flows stabilize into a reliable trend and the macro environment stops increasing volatility, a “reset” remains a promising setup rather than a guaranteed rebound.