Why Are Crypto Markets Having Such A Good January?

Cryptocurrency markets are off to a great start this year, experiencing some compelling gains as investors push digital assets higher in spite of industry headwinds.

Bitcoin, the world’s largest digital currency by market value, approached $24,000 last night, having climbed roughly 45% thus far in 2023, CoinDesk figures show.

Earlier this month, a Goldman Sachs analysis 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 more than $1,660 on January 21, having climbed 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 over 35% since January 1, according to CoinMarketCap.

This upside has materialized following a year where bitcoin fell 65%, according to CoinDesk Research’s 2022 Annual Crypto Review, and the total value of the digital currency markets declined roughly 66%, CoinMarketCap figures reveal.

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

Monetary Optimism

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

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

A CNBC article, published earlier this month, spoke to this matter.

“With inflation now showing signs of cooling in the U.S., some market players are hopeful that central banks will start easing the pace of rate rises, or even slash rates,” the piece stated.

If the Fed slows down the pace of monetary tightening, or cuts the benchmark rate, it could serve as a boon to risk assets, including cryptocurrencies and stocks, and investor expectations that this slowdown will materialize could certainly prove bullish.

Brett Sifling, an investment advisor for Gerber Kawasaki Wealth & Investment Management, commented on these developments via email.

“The Fed has finally started showing signs that they might be slowing down or even stopping rate increases by mid-year,” he stated.

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

“There are even talks of them cutting rates towards the end of the year, which could bring further speculation to assets like Bitcoin.”

Independent cryptocurrency analyst Armando Aguilar also commented on this situation, offering emailed commentary.

“Investor confidence has definitely played a role in the recovery of the overall crypto market as investors believe that the Fed could pull back on restrictive 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 input via email.

“The determination of whether the CNBC article is accurate or not actually turns on 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 very significantly outperformed fiat markets in 2023,” Enneking noted.

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

‘January Effect’?

Earlier this month, a Bloomberg article asked whether the so-called “January Effect,” which originally observed small-cap stocks outperforming more established ones at the start of the year, had anything to do with cryptocurrencies rallying this month.

The piece, which was authored by Bloomberg senior editor Michael P. Regan, quoted a newsletter written by investor Jeremy Grantham, who serves as cofounder and long-term investment strategist for asset manager GMO.

“January features relative strength in characteristics beloved of individuals. Institutions love large capitalization and quality, and these characteristics provably outperform their beta for the remaining 11 months,” he stated.

“But historically individuals prefer small caps, stocks that are obviously cheap, and confusingly, stocks that got hammered the year before,” 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 this is merely crypto’s usual style of behaving like the most speculative stocks, almost all of which had a terrible 2022.”

Andrew Rossow, an internet attorney and Web3 media advisor, seemed to agree with this assessment, offering input through email.

“Speaking to the ‘January Effect,’ I do think that what we are seeing right now is ‘on par’ with the traditional behavior we have seen from speculative digital assets like Bitcoin — speculation will continue to drive these prices up and down,” he stated.

However, Enneking threw voiced his doubts about this particular explanation.

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

“The originator of it (Sidney Wachtel) actually stated that small-caps outperform large-caps in the first half of January,” said Enneking.

“Since then, the term has been generalized to the point where it’s even a less accurate indicator than it was initially.”

Bitcoin’s Recent Recovery

Enneking offered an alternate take on the matter, pointing to a recovery after the cryptocurrency markets bottomed out late last year.

“As I pointed out in my November 15, Out On a Limb Podcast, the FTX debacle accelerated capitulation in the crypto markets and ‘forced’ the bottom at around $15.5k,” he stated.

“That has proven to be the case, even with a rocky December and January is simply building on that – along with the annual optimism of a new year.”

Sifling offered a similar assessment of the situation.

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

“After so much bad news, people could view it as an opportunity to buy the dip and accumulate more digital assets. It’s correlation to the equity market remains high and equities have also gained major momentum this month.”

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