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main conclusions
Bitcoin is back in the high 20s, Ethereum has crossed $1,500 and altcoins are moving north in what is the biggest crypto rally in 9 months. Cooler Inflation Rates The next big day for crypto markets is February 1st, when the Fed will decide on the latest interest rate policy. Solana is up 130% since the start of the year, leading the altcoins Even the memes are rising, with Dogecoin and Shiba Inu again making moves Some analysts fear the market is premature in pricing a Fed pivot earlier than expected Crypto markets are delivering a strong dose of nostalgia at the start of the year, on its strongest rally in 9 months. Bitcoin is trading close to $21,000, Ethereum is at $1,500 and altcoins are also moving up aggressively. I captured a picture of the market on this day last week as the markets rallied to start the new year. A week later, the direction is the same – but the rally has moved up a notch. The chart below presents cryptocurrency price returns at the beginning of the year, a sea of upward movements:
What is causing prices to rise?
In the last year, inflation has perhaps replaced pandemic as the dirtiest word in our vocabulary. But it’s for good reason, with the world gripped by an inflationary crisis the likes of which we haven’t seen since the 1970s. But in recent weeks, a bit of optimism that inflation has peaked has seeped into the market. This led investors to bet that the Federal Reserve would back away from interest rate hikes sooner than expected. And the markets are doing something most people forgot they could do – they went up. The market in general has increased. The S&P 500 rose nearly 5%. Cryptocurrency prices can rise 5% of a candle in a matter of minutes, but the stock market is obviously less volatile and 5% equates to a strong move – there have been only four occasions over what has been a very volatile 2022 when the market has gone up so much in one week. Interest rates are the key to cryptocurrency markets. Altcoins trade as leveraged bets on Bitcoin, and Bitcoin has been trading as a leveraged bet on the S&P 500 for the past year. Since interest rates started to rise in April 2022, the price of Bitcoin has been in freefall. While there have been swings from the crypto market itself (the LUNA death spiral, the Celsius crash, and the stunning FTX debacle come to mind), the key variable is arguably a tight monetary policy that suppresses the value of all risk assets. Bitcoin will not be allowed to rise until the Fed changes its stance, and last week investors moved into a position in hopes that this change will come sooner than anticipated.
Will this continue?
The next key date is February 1st, when the Federal Reserve will meet to decide the latest interest rate policy. These FOMC meetings, along with the monthly CPI report, were the main drivers of the markets last year. I wrote five days ago about how we would get volatility to end the week when we come across the CPI report. That report came as predicted, but it reflected another month of falling inflation, which, as described earlier, drove markets higher. However, the rise in prices is somewhat surprising when you consider the words that have so far come out of Fed Chairman Jerome Powell’s mouth. He has been adamant that a pivot is not coming and has even criticized the market’s premature perception that monetary policy will be eased again. Indeed, there were many false starts in the market last year, with investors repeatedly betting that the Fed was bluffing about the extent and speed with which interest rate hikes would be implemented. This is part of the reason why the subsequent downward movement was so fierce. In fact, the graphic below describes the picture better than a thousand words:
Altcoins make bigger moves
As we’ve seen time and again throughout crypto history, higher-beta altcoins are generating significantly greater gains than Bitcoin. Of course, this comes from a lower base – the downside of higher beta is that when times are tough, the pain is much more severe, and altcoins have certainly experienced that during this crypto winter. Gains were led by Solana, Tier 1 which had a tumultuous year even by cryptographic standards. I wrote an analysis about it two weeks ago, but the coin plummeted from a spot holding third place behind Ethereum and Bitcoin to barely hold out in the top 20. A combination of repeated outages, big projects heading out to rival blockchains, and a close connection to Sam Bankman-Fried have contributed to Solana 97% off its all-time high of $260, trading at the end of 2022 at $7.70. But by typical crypto standards, a shift in sentiment led by the inexplicable BONK meme coin helped boost the coin, which is now trading at $23.40, having more than doubled in the past two weeks. Meme coins are enjoying gains across the board. Normally this would be the part where I would try to insert some analysis as to why, but now we know there’s no real pattern to the meme coin madness, so instead I’ll simply list the returns. Shiba Inu is up 29%, while the parent of them all, Dogecoin, has added 20% and is now trading at a market cap of $11.2 billion.
What will happen next?
For now, investors are riding the gains, simply trying to survive through 2022. But looking at the market, while prices have soared, volatility remains low and volumes are still a long way from what they were during the pandemic. The market has been eerily serene since the FTX implosion, and this is the first real move of any significance. While optimism is obvious, investors remain somewhat cautious and prices are still extremely subdued from last year. A 75% drop followed by a 20% rally still equates to a 70% drop. So while the green candlesticks are looking pretty this morning for traders – and long overdue – the scale of the crypto damage here is still severe. Institutional adoption has likely been severely hampered by the numerous scandals, there is still the potential for more dominoes to fall in the FTX contagion web, and macro/inflation remains highly uncertain. The last two weeks represent some much needed positive news, not just for cryptocurrencies, but for the economy as a whole. Investors are celebrating this with rising charts, but these are still uncertain times with many upheavals ahead.
