Record-low volatility and potentially positive macroeconomic data are providing crypto traders with a few opportunities.
While 2022 ended on a grim note with macro headwinds providing little hope of a revival in 2023, the start of a new year has surprised bears with a surge in Bitcoin (BTC), Ether (ETH) and altcoin prices. The period of sparse volatility in the crypto market appears to be ending with a breakout on the upside.
The increase has been particularly striking in some altcoins such as Lido (LIDO), Solana (SOL), and Cardano (ADA). The primary factors promoting 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. The negative rates implies that most traders are holding short positions, giving an opportunity for whale buyers to run their stop losses. Funding rates for some other tokens remain exposed to a short squeeze.
Moreover, the new year has also seen the re-emergence of the degen gambling that had taken a back seat after the FTX collapse in November 2022. A meme coin price surge is evidence of the residual degen spirit. Technically, the total market capitalization of altcoins has surpassed a key technical resistance level as bullish momentum builds.
While the sustainability of the bull run is questionable due to the broader trend remaining bearish, the fledgling uptrend could still bring some pain for late sellers. The five primary factors influencing altcoin prices are:
Job market data revives the hope of a soft landing
Defying the Dow’s estimate for 200,000 nonfarm payrolls and market expectations of a slowdown, labor market data from December 2022 showed a 230,000 or 0.2% increase in employment.
A strong jobs market goes against the prevalent recession claims and acts as a catalyst for a risk-on rally. The consumer inflation price (CPI) reading for December 2022 coming out on Jan. 12 will be instrumental in either building on the newfound bullish sentiment or returning to negative sentiments.
If inflation continued its downtrend, with December’s CPI print below 7.7%, then the market’s confidence in a soft-landing could increase. However, if inflation rose in December, then the chances of a higher rate hike in the U.S. Federal Reserve meeting toward the end of January risks a steep correction.
Traders hunt for perpetual swaps with negative funding rates
As the spot trading volume and liquidity on cryptocurrency exchanges dried up toward the year-end, especially during the holiday season, futures markets gained more influence in moving the prices. A contrarian price reaction against a crowded trade position is highly likely.
Solana’s latest surge in prices is clear evidence of short-squeeze driving prices. Over the weekend, $200 million in SOL shorts were liquidated as its price surged over 27% from Jan. 6 low of $13. According to independent market analyst Alex Kurger, “SOL still has room to go but the outperformance phase is mostly behind.”
Funding rate for SOL perpetual swaps. Source: Coinglass
While Solana’s pump might be close to over, the majority of traders are still net short on numerous altcoins like Apecoin (APE), Tron (TRX), Bitcoin Cash (BCH), and Gala Games (GALA). This provides an opportunity for buyers to push the price up and hunt the stop-loss liquidity of perpetual swap sellers.
Funding rate for altcoins across crypto exchanges. Source: Coinglass
Meme coins pump, then dump
In the first week of January 2023, a Solana-based meme coin named BONK experienced a whooping 25x surge. The rise symbolized the degenerate gambling spirit that was prevalent during the 2021 to 2022 bull run. Bear markets, on the other hand, tend to promote caution among traders.
Despite BONK’s eventual price collapse, the successful pump-and-dump playout of meme coins like it suggest that some traders are still indulging in high-risk plays.
BONK price chart. Source: CoinGecko
Positive technical breakout
The altcoin market capitalization broke above the 50-day exponential moving average (EMA) at $465 billion. Buyers will likely target the 100-day EMA at $563 billion—an expected average 20% gain across the tokens. Technical traders would look to tap these key levels before reversal begins.
The relative strength indicator (RSI) for altcoin market capitalization also moved into bullish territory, increasing above the 60-point resistance. Furthermore, if buyers build support above the 50-day EMA with positive volumes, the short-term uptrend could extend toward the end of Q1 2023.
Total market capitalization of altcoin (excluding Bitcoin). Source: TradingView
Historical trends and positive sentiment spike
The sustainability of the bullish altcoin run is questionable, especially since the underlying trend remains bearish. It’s difficult to identify the fundamental catalyst supporting this bull run, and Bitcoin’s price trades below the resistance between $18,200 and $19,000. Thus, the uptrend will likely fade as buyers get exhausted.
If we look at previous crypto cycles, altcoins outperformed Bitcoin in a bull run, and the following cooldown period saw a cross-over with Bitcoin leading the crypto market gains.
The recent parabolic run of 2021 played out similarly, with altcoins outperforming Bitcoin. However, the correction period hasn’t seen a wipeout of the altcoin market relative to Bitcoin.
Both altcoin market capitalization and Bitcoin’s price have lost 75% of their value from the peak, as opposed to altcoin losses surpassing Bitcoin.
Altcoins outperform Bitcoin during bull markets. Source: TradingView
An exception to the above rule can be due to Ether’s increasing dominance in the market. Ethereum has maintained its market dominance around 20% with technical breakthroughs such as the shift to a energy-friendly proof-of-stake mechanism and reduced inflation supporting its price strongly despite the negative trend. Still, a deeper correction in the broader altcoin market capitalization cannot be ruled out.
Bitcoin (orange) Ethereum (blue) dominance over the crypto market. Source: TradingView
Lately, social media circles have witnessed a revival of positive sentiment. Santiment data shows that the social media mentions of keywords like “buy the dip” and “bottom” spiked on platforms like Twitter, Reddit, and Telegram. Usually, a positive sentiment spike is a top indicator suggesting a reversal of the bullish price trend.
Social media volume for “buy the dip” and “bottom” key words. Source: Santiment
One of the first hurdles will be supporting the price after a wipeout of short orders. Being one of the first tokens to surge, Solana and Cardano could provide clues that point toward the end of the uptrend.
If the price of SOL breaks below support at $14.33 with a simultaneous drop below $0.30 for ADA, it could be a warning sign of the bull’s exhaustion.
At the same time, tokens like LIDO that benefit from the liquid staking derivative narrative could continue to rise until Ethereum core developers implement the Shanghai upgrade. Macro market movers such as the CPI print and Bitcoin’s price action will also play a crucial role in sustaining an altcoin bull run.
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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.