Why Are Crypto Markets Having Such A Good January?

Cryptocurrency markets are off to a great start this year, seeing some compelling gains as investors push digital assets despite industry headwinds.

Bitcoin, the world's largest digital currency by market value, approached $24,000 last night, having risen roughly 45% so far in 2023. CoinDesk Figures show.

Earlier this month, an 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, reached over $1,660 on Jan. 21, having risen roughly 40% since the start of 2023, additional CoinDesk Data 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 have also been shared across the broader cryptocurrency market, which has gained more than 35% since January 1, according to CoinMarketCap.

This advantage has materialized after a year in which Bitcoin fell 65%, according to CoinDesk Research. 2022 Annual Crypto Reviewand the total value of digital currency markets decreased by approximately 66%, CoinMarketCap figures reveal.

As for what helped drive the recent strength in the cryptocurrency markets, analysts identified several potential causative variables.

Monetary Optimism

Monetary tightening has generated substantial headlines over the past year, with the Federal Reserve increasing the target range for its benchmark fed funds rate by 425 basis points since March.

However, some market watchers have predicted that this central bank will slow the pace of rate hikes.

A CNBC Articlepublished earlier this month, ruled on this matter.

“With inflation now showing signs of cooling in the US, some market players are hopeful that central banks will start to slow, or even cut, rate hikes,” the article said.

If the Federal Reserve slows the pace of monetary tightening or lowers the benchmark rate, it could serve as a boon to risky assets including cryptocurrencies and stocks, and investor expectations that this slowdown will materialize could certainly prove optimistic.

Brett Sifling, investment adviser at Gerber Kawasaki Wealth Management and Investmentscommented on these developments via email.

“The Fed has finally started to show signs that it may be slowing or even stopping rate hikes by mid-year,” he said.

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

“There is even talk that they will cut rates towards the end of the year, which could lead to more speculation on assets like Bitcoin.”

Independent cryptocurrency analyst Armando Aguilar also commented on this situation, offering comments via email.

“Investor confidence has definitely played a role in the broader crypto market recovery, as investors believe the Fed could back out of tight monetary policy and give markets a breather.”

Tim Enneking, CEO of digital capital managementoffered a different perspective on the matter, and also provided information via email.

“The determination of whether or not the CNBC article is accurate actually revolves around a different issue: Will the strong correlation between fiat markets continue? If so, then the article is correct,” he stated.

“However, that correlation, while still high, appears to be weakening in 2023. After all, crypto markets have significantly outperformed fiat markets in 2023,” Enneking noted.

“So while QT certainly has an effect on BTC prices, that effect is not as large as it was last year and will likely continue to diminish,” he stated.

'January effect'?

Earlier this month, a Bloomberg Article He asked if the so-called “January Effect,” which originally saw small-cap stocks outperform more established ones earlier in the year, had anything to do with the rally in cryptocurrencies this month.

The article, which was written by Bloomberg Senior Editor Michael P. Regan, cited a bulletin written by investor Jeremy Grantham, who serves as co-founder and long-term investment strategist for asset manager GMO.

“January presents relative strength in people's beloved characteristics. Institutions love large cap and quality, and these features are likely to be out of beta for the remaining 11 months,” he stated.

“But historically, people prefer small-cap stocks, which are obviously cheap and, confusingly, stocks that took a beating the year before,” Grantham added.

“I read about the recent 20% rally in Bitcoin and friends, which was supposedly due to exotic reasons,” he wrote.

“To me, this is more likely just cryptocurrency's usual style of behaving like the most speculative stocks, almost all of which had a terrible 2022.”

Andrew Rossow, an Internet lawyer and Web3 media consultant, seemed to agree with this assessment and offered his opinion via email.

"Speaking of the 'January Effect,' I think what we're seeing right now is 'on par' with the traditional behavior we've seen from speculative digital assets like Bitcoin: Speculation will continue to drive these prices up and down. ". he claimed.

However, Enneking expressed doubts about this particular explanation.

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

"The creator of this (Sidney Wachtel) actually stated that small caps outperform large caps in the first half of January," Enneking said.

"Since then, the term has become generalized to the point that it is an even less accurate indicator than it initially was."

The recent recovery of Bitcoin

Enneking offered an alternate version of the matter, signaling a recovery after cryptocurrency markets bottomed out late last year.

“As I noted in my Out On a Limb podcast on November 15, the FTX debacle accelerated the capitulation in the crypto markets and 'forced' the bottom by around $15.5k,” he stated.

"That has proven to be the case, even with a rocky December and January just builds on that, along with the yearly optimism of a new year."

Sifling offered a similar assessment of the situation.

“I think the cryptocurrency market was pretty depressed after the dissolution of major players like FTX, Genesis, BlockFi, etc.,” he stated.

“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 stock market remains high and stocks have also gained a lot of momentum this month."

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