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Crypto markets jumped at the start of the year on positive macro news Next inflation reading comes out on Thursday, which will cause more volatility The fight against inflation has a long way to go, with investors still not out of the woods Solana rose 65% since New Year’s Day, but has dropped sharply before and the problems remain After what was, to say the least, a rather disappointing year for cryptocurrencies in 2022, the new year is off to a positive start. Bitcoin, Ethereum and all their other friends were devastated last year, but in the opening nine days of 2023 there is a green dot on the board. Let’s look at why this is and whether we’ll see more of the same or if the price action will revert back to the 2022 pain.
Macro Provides Crypto Race Boost
The biggest reason for the cryptocurrency’s jump this year is the same one that brought the whole space down last year: macro. The stock market had a positive start to the year. This stems from inflation readings around the world, which were lower than expected. While there is still a long way to go in the battle against this rampant cost-of-living crisis, the latest data has given investors hope that central banks may change their policy of high interest rates sooner than previously anticipated. After a decade of low interest rates, the world transitioned to a new interest rate paradigm in 2022, when rates rose aggressively in response to the inflationary crisis. The aim was to control demand and ultimately raise prices. As a result, all risky assets have gone downhill and there is nothing riskier than cryptocurrency. Then the market dropped.
Solana separates from the market
Of course, while the macro is clearly the big driver here, there are still idiosyncratic risks and happenings in the crypto space. Look no further than last year, when three events (Luna, Celsius, and FTX) caused major stock market dips and deviations, which otherwise exhibited extremely high correlation with Bitcoin. To kick off the year, we saw Solana break out ahead of the crowd, posting a remarkable 65% return so far, having opened the year at $10 and now trading at $16.50. I wrote an article last week diving deep into Solana, but suffice it to say that the coin has major issues. Between repeated outages, it has seen several large projects flee blockchain and has also suffered as a result of its close ties to Sam Bankman-Fired. The graph below shows that while this rebound looks large at 65%, it is still a drop in the ocean compared to the freefall it has experienced. This rise over the past week can be at least partially attributed to Bonk, the latest meme coin phenomenon I also reviewed last week. We already know not to read too much about dog tokens, but even so, the surge has at least eased some of the pain for Solana investors.
Does Bitcoin continue to rise?
As for the future, that is anyone’s guess. The next big day is Thursday, when the latest CPI numbers will be released. If US inflation is milder than expected, you can expect markets to recover with renewed hope. In fact, it boils down to the same thing that happened last year: cryptocurrency markets will only significantly recover when the Federal Reserve moves away from its current aggressive interest rate policy. For its part, the Fed maintains that rates will continue to rise as long as inflation is high. With the job market still tight and core inflation remaining stubborn (the base rate has dropped partially due to energy prices, while core inflation is typically the number policymakers focus on), there is still a long way to go. . Ultimately, the year 2023 in cryptocurrency markets will likely be decided based on what happens to this tussle between the Fed and inflation. Until that much-fantasized pivot actually occurs, it could remain a difficult time for digital markets.
