Why Are Crypto Markets Having Such A Good January?

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Cryptocurrency markets have rallied so far in 2023. (Photo Illustration by Chesnot/Getty Images)

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Cryptocurrency markets have gotten off to a strong start this year, posting compelling gains as investors push digital assets higher despite industry headwinds.

Bitcoin, the world’s largest digital currency by market value, approached $24,000 last night, after soaring around 45% so far in 2023, according to figures from CoinDesk.

Earlier this month, analysis by Goldman Sachs identified this cryptocurrency as the best performing asset so far this year.

Ether, the world’s second-largest digital currency by total market capitalization, hit over $1,660 on Jan. 21, after surging around 40% since the start of 2023, additional data from CoinDesk reveals.

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

These impressive gains were also shared across the broader cryptocurrency market, which has gained more than 35% since Jan. 1, according to CoinMarketCap.

This rise materialized after a year in which bitcoin fell 65%, according to CoinDesk Researchs 2022 Annual Crypto Review, and the total value of digital currency markets fell by around 66%, figures from CoinMarketCap reveal.

As for what has contributed to the recent strength in cryptocurrency markets, analysts have identified several potential causal variables.

Monetary optimism

Monetary tightening has been in the headlines over the past year, with the Federal Reserve raising the target range for its key federal funds rate by 425 basis points since March.

However, some market watchers predicted that this central bank would reduce the pace of rate hikes.

A CNBC article, published earlier this month, addressed this question.

With inflation now showing signs of easing in the United States, some market participants are hopeful that central banks will begin to slow the pace of rate hikes, or even cut rates dramatically, the article said.

If the Fed slows the pace of monetary tightening or lowers the benchmark rate, it could be a boon for risky assets, including cryptocurrencies and equities, and investors’ expectations of this slowdown materializing could certainly turn out to be bullish.

Brett Sifling, investment adviser for Gerber Kawasaki Wealth & Investment Management, commented on the developments via email.

The Fed has finally started to show signs that it could slow or even halt rate hikes by the middle of the year, he said.

This pause in monetary tightening policies could allow for more liquidity and speculation from market participants, which bodes well for digital assets, Sifling added.

There is even talk of a rate cut towards the end of the year, which could lead to further speculation in assets like Bitcoin.

Independent cryptocurrency analyst Armando Aguilar also commented on the situation, offering comment via email.

Investor confidence has certainly played a role in the recovery of the overall crypto market, as investors believe the Fed could reverse its tight monetary policy and give markets some breathing room.

Tim Enneking, managing director of Digital Capital Management, offered a different perspective on the matter, also providing comments via email.

Determining whether or not the CNBC article is actually accurate revolves around another question: Will the high correlation between fiat markets continue? If so, then the article is correct, he said.

However, this correlation, while still high, appears to be weakening in 2023. After all, crypto markets have overwhelmingly outperformed fiat markets in 2023, Enneking noted.

So while QT is definitely having an effect on BTC prices, that effect is not as large as last year and will likely continue to decline, he said.

January effect?

Earlier this month, a Bloomberg article asked if the so-called January effect, which originally observed that small-cap stocks outperformed more established stocks at the start of the year, had anything to do with it. with the cryptocurrency rally this month.

The article, written by Bloomberg editor Michael P. Regan, cited a newsletter written by investor Jeremy Grantham, who is a co-founder and long-term investment strategist for asset manager GMO.

January presents a relative strength in the characteristics appreciated by individuals. Institutions like large caps and quality, and those characteristics are clearly outperforming their beta for the remaining 11 months, he said.

But historically, individuals prefer small caps, stocks that are obviously cheap and, confusingly, stocks that have been hammered in the previous year, Grantham added.

I read about the recent 20% rally in Bitcoin and friends, which was allegedly for exotic reasons, he wrote.

More likely to me, it’s just the usual crypto style of behaving like the more speculative stocks, which almost all had a terrible 2022.

Andrew Rossow, an internet lawyer and Web3 media adviser, seemed to agree with this assessment, offering an email contribution.

Coming to the January effect, I think what we’re seeing right now is on par with the traditional behavior we’ve seen speculative digital assets like bitcoin speculation will continue to drive these prices up and down, a- he declared.

However, Enneking expressed his doubts about this particular explanation.

The January effect is not a particularly good indicator, he said.

Its author (Sidney Wachtel) actually said that small caps outperformed large caps in the first half of January, Enneking said.

Since then, the term has become widespread to the point of being an even less accurate indicator than it was initially.

Recent Bitcoin recovery

Enneking offered another take on the matter, pointing to a recovery after cryptocurrency markets hit bottom late last year.

As I highlighted in my Out On a Limb podcast on Nov. 15, the FTX debacle accelerated the capitulation in the crypto markets and forced the bottom to around $15.5,000, he said.

That turned out to be the case, even with a rocky December and January just builds on that with the yearly optimism of a new year.

Sifling offered a similar assessment of the situation.

I think the crypto market was quite depressed after breaking up major players like FTX, Genesis, BlockFi, etc., he said.

After so much bad news, people might see it as an opportunity to buy the dip and accumulate more digital assets. Its correlation with the equity market remains high and equities have also gained momentum this month.

Disclosure: I own bitcoin, bitcoin cash, litecoin, ether, EOS, and sol.

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