5 signs an altcoin bull run could be underway

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While 2022 ended on a gloomy note with macro headwinds leaving little hope for a revival in 2023, the start of a new year surprised bears with a surge in Bitcoin (BTC) prices , Ether (ETH) and altcoin. The period of low volatility in the crypto market appears to be ending with a breakout to the upside.

The increase was particularly striking in some altcoins such as Lido (LIDO), Solana (SOL) and Cardano (ADA). The main factors favoring the spike in these coins are the upcoming Ethereum Shanghai update (for LIDO) and the negative funding rate in the futures market, especially for SOL. Negative rates imply that most traders are holding short positions, which gives whale buyers the opportunity to execute their stop losses. Funding rates for some other tokens remain under short pressure.

Additionally, the new year has also seen the re-emergence of degen gaming which had been pushed into the background after the collapse of FTX in November 2022. A surge in meme coin prices is proof of the residual degen spirit. Technically, the total altcoin market cap has broken above a key technical resistance level as bullish momentum builds.

Although the sustainability of the bull run is questionable due to the overall trend remaining bearish, the incipient uptrend could still hurt lagging sellers. The five main factors influencing altcoin prices are:

Labor market data revives hopes of a soft landing

Defying the Dows estimate for 200,000 non-farm payrolls and market expectations of a slowdown, labor market data for December 2022 showed an increase of 230,000 or 0.2% in employment.

A strong labor market runs counter to common claims of recession and acts as a catalyst for a recovery in risk. The Consumer Inflation (CPI) price reading for December 2022 which will be released on January 12 will be key to either building on new bullish sentiment or returning to negative sentiment.

Should inflation continue its downward trend, with December CPI below 7.7%, market confidence in a soft landing could increase. However, if inflation rose in December, the chances of a bigger rate hike at the US Federal Reserve meeting towards the end of January risk a sharp correction.

Traders look for perpetual swaps with negative funding rates

As spot trading volume and liquidity on cryptocurrency exchanges dried up towards the end of the year, particularly during the holiday season, futures markets gained influence over price movement. . An adverse price reaction to an encumbered trade position is very likely.

Solana’s latest price surge is clear evidence of short-term driving prices. Over the weekend, $200 million of SOL shorts were liquidated as its price jumped more than 27% from the January 6 low of $13. According to independent market analyst Alex Kurger, SOL still has room, but the outperformance phase is largely overdue.

Funding rate for SOL perpetual swaps. Source: Coinglass

While the Solanas pump may be almost complete, the majority of traders are still short of many altcoins like Apecoin (APE), Tron (TRX), Bitcoin Cash (BCH), and Gala Games (GALA). This provides buyers with the opportunity to push the price up and chase stop-loss liquidity from sellers of perpetual swaps.

Funding rates for altcoins on crypto exchanges. Source: CoinglassMeme coin pump, then dump

In the first week of January 2023, a Solana-based meme piece named BONK saw a 25x surge. The rise symbolized the degenerate gambling that prevailed during the bull run from 2021 to 2022. Bear markets, on the other hand, tend to urge traders to be cautious.

Despite BONK’s eventual price collapse, the successful spread of meme pieces like this suggests that some traders are still indulging in high-risk games.

BONK price chart. Source: CoinGeckoPositive Technical Breakout

The market capitalization of the altcoin surpassed the 50-day exponential moving average (EMA) at $465 billion. Buyers will likely target the 100-day EMA at $563 billion, an expected average gain of 20% on the tokens. Technical traders would look to exploit these key levels before the reversal begins.

The relative strength indicator (RSI) of altcoin market capitalization also moved into bullish territory, breaking above the resistance by 60 points. Additionally, if buyers build support above the 50-day EMA with positive volumes, the short-term uptrend could extend towards the end of Q1 2023.

Total market capitalization of the altcoin (excluding Bitcoin). Source: TradingView Historical Trends and Peak Positive Sentiment

The sustainability of the altcoin’s bull run is questionable, especially as the underlying trend remains bearish. It is difficult to identify the fundamental catalyst supporting this bull run, and Bitcoin price is trading below the resistance between $18,200 and $19,000. Thus, the uptrend will likely fade as the buyers run out.

If we look at previous crypto cycles, altcoins outperformed Bitcoin in a bull run, and the following cooling period saw a crossover with Bitcoin leading the crypto market gains.

The recent parabolic run of 2021 played out similarly, with altcoins outperforming Bitcoin. However, the correction period did not see an altcoin market annihilation against Bitcoin.

The altcoin market cap and bitcoin price have lost 75% of their value since the peak, as opposed to altcoin losses exceeding bitcoin.

Altcoins outperform Bitcoins during bull markets. Source: Trading View

An exception to the above rule may be due to the increasing dominance of Ethers in the market. Ethereum maintained its market dominance around 20% with technical breakthroughs such as the move to an energy-efficient proof-of-stake mechanism and reduced inflation strongly supporting its price despite the negative trend. Nevertheless, a deeper correction in the broader market capitalization of the altcoin cannot be ruled out.

Bitcoin (orange) Ethereum (blue) dominance in the crypto market. Source: Trading View

Lately, social media circles have witnessed an upsurge in positive sentiment. Santiment’s data shows that social media mentions keywords such as buy dip and dope bottom on platforms like Twitter, Reddit and Telegram. Usually, a spike in positive sentiment is a top indicator suggesting a reversal in the uptrend in price.

Social media volume to buy bottom and bottom keywords. Source: Santiment

One of the first hurdles will be supporting the price after short orders are eliminated. Being one of the first tokens to rise, Solana and Cardano could provide clues that point to the end of the uptrend.

If the price of SOL breaks below the support at $14.33 with a simultaneous drop below $0.30 for ADA, this could be a harbinger of bull exhaustion.

At the same time, tokens like LIDO that benefit from the liquid staking derivative narrative may continue to rise until Ethereum core developers implement the Shanghai upgrade. Macro market drivers such as CPI printing and Bitcoin price action will also play a crucial role in sustaining an altcoin bull run.

The views, thoughts and opinions expressed herein are the sole authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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