Crypto Prices Rise After Strongest Rally in 9 Months, But Why?

Key points

• Bitcoin is back in the $20,000 range, Ethereum has surpassed $1,500 and altcoins continue to rise in the biggest crypto rally in 9 months
• Optimism that the Fed will move away from high interest rate policy sooner than expected following the lower inflation data
• The next big day for the crypto markets is February 1st, when the Fed will decide on the current interest rate policy
• Solana is up 130% since the beginning of the year and is leading the altcoins
• Even meme coins like Dogecoin and Shiba Inu continue to rise
• Some analysts fear the market is prematurely pricing in an earlier-than-expected Fed pivot

The crypto markets are starting the new year with a strong dose of nostalgia and are recording their strongest rally in 9 months.

Bitcoin is trading close to $21,000, Ethereum at $1,500 and the altcoins are also rising sharply.

I have one Snapshot of the market made on this day last week as markets jumped at the start of the new year. A week later, the direction is the same – but the rally has been kicked up a notch. The chart below shows crypto price action at the start of the year, a flurry of upward moves:

What is the cause of the price increase?

Last year the Inflation maybe the word Pandemic replaced as the dirtiest word in our vocabulary. And for good reason, as the world is gripped by an inflation crisis the likes of which we have not seen since the 1970s.

But in recent weeks there has been some optimism in the market that inflation has peaked. This has led investors to bet that the Federal Reserve will move away from raising interest rates sooner than expected. And the markets are doing something most people have forgotten they can do – they are rising.

The market is generally up. The S&P 500 is up almost 5%. Crypto prices can make up for a 5% rise in a matter of minutes, but the stock market is obviously less volatile, and 5% means a big move – in the very volatile year of 2022, there were only four occasions when the market moved by that much in a week increased.

Interest rates are key for the crypto markets. Altcoins are trading like leveraged bets on Bitcoin, and Bitcoin has been trading like a leveraged bet on the S&P 500 for the last year or so. Since interest rates were raised in April 2022, the Bitcoin price has been in free fall.

While there have been fluctuations from the crypto market itself (the LUNA death spiral, the Celsius crash and the breathtaking FTX-Debacle come to mind), the key variable is undoubtedly tight monetary policy, which suppresses the value of all risk assets. Bitcoin will not be able to rise until the Fed makes a policy change, and over the last week investors have shifted to a stance where they expect that policy change sooner than before.

Will it continue?

The next important date is February 1st, when the US Federal Reserve will decide on the current interest rate policy. These FOMC meetings, along with the monthly CPI report, were the main influencers on the markets last year.

I plan to five days wrote about how we would get volatility at the end of the week when we came across the CPI report. This report came as expected, but reflected another month of falling inflation, which, as previously described, pushed markets higher.

Still, the price rise is somewhat surprising considering the words that have come out of Fed Chairman Jerome Powell so far. He has emphasized that a change of course is not imminent and has even commented on the market’s supposedly premature assumption that monetary policy will be relaxed again.

In fact, there had been many false starts in the market over the past year, with investors repeatedly betting that the Fed was bluffing about the size and speed of rate hikes. This is one of the reasons why the subsequent downward move was so severe.

In truth, the following table paints the picture better than a thousand words:

Altcoins are gaining more strength

As we have seen repeatedly throughout the history of cryptocurrencies, the higher beta altcoins see significantly higher profits than Bitcoin. Of course, this is from a lower base – the downside of a higher beta is that in difficult times the pain is much greater, and altcoins have certainly experienced this this crypto winter.

The gains were led by Layer 1 Solana, which has had a turbulent year even by crypto standards. I plan to two weeks wrote a deep dive on it, but the coin had plummeted from a point where it held third place behind Ethereum and Bitcoin to barely staying in the top 20.

A combination of repeated outages, top projects migrating to competing blockchains, and a close association with the disgraced Sam Bankman-Fried all contributed to Solana losing 97% from its all-time high of $260 towards the end of 2022 Traded at $7.70.

But as is typical for cryptocurrencies, there has been a shift in sentiment, led by the completely inexplicable Memecoin, BONKhelped drive up the coin’s price, which is now at $23.40, more than doubling in the last two weeks.

Memecoins are seeing gains across the board. This would normally be the part where I would try to give an analysis of why, but we know by now that there is no real pattern to the memecoin craze, so I’ll just list the returns instead. Shiba Inu is up 29%, while the daddy of them all, Dogecoin, is up 20% and now has a market cap of $11.2 billion.

What happens next?

For now, investors are enjoying the gains after simply trying to survive through all of 2022. But looking at the market, volatility remains low and volumes are still a long way from what they were during the pandemic while prices have skyrocketed.

The market has been unusually quiet since the FTX implosion and this is the first significant move. Although the optimism is evident, investors remain somewhat cautious and prices are still extremely low compared to this time last year.

A 75% decline followed by a 20% rally is still a 70% decline. So while the green candlesticks are pretty for traders this morning – and long overdue – the extent of the damage to crypto here is still severe. The institutional acceptance was probably due to the countless scandals severely impairedthere is still the possibility of more Dominosteine fall in the FTX contagion network, and macroeconomic developments/inflation remain highly uncertain.

The last two weeks brought some much-needed positive news, not just for crypto but for the economy as a whole. Investors are celebrating this with rising prices, but these are still uncertain times that will bring many twists and turns.