While 2022 ended on a dour note with macro headwinds showing little hope of a recovery in 2023, the start of the new year surprised the bears with gains in Bitcoin (BTC), Ether (ETH) and altcoin prices. The period of low volatility in the cryptocurrency market is ending with a bull.
The growth is particularly noticeable in some altcoins such as Lido (LIDO), Solana (SOL) and Cardano (ADA). The main factors promoting the jump in these coins are the upcoming Ethereum Shanghai update (for LIDO) and the negative funding rate in the futures market, especially for SOL. Negative rates mean that most traders are taking short positions, allowing whale buyers to manage stop losses. Funding rates for some other tokens are subject to a brief squeeze.
Moreover, the new year also saw the re-emergence of degen gambling, which took a back seat after the collapse of FTX in November. Memecoin’s price increase is proof of the residual degen spirit. Technically, the total market capitalization of altcoins has crossed a major technical resistance level as the bullish momentum picks up.
While the durability of the bull run is in doubt due to the broader trend downtrend, the nascent uptrend could still bring some pain for late sellers. Here are the five main factors that influence altcoin prices:
Labor market data revives hope of a soft landing
The labor market report showed 230,000 added, employment rising 0.2%, contrary to Dow Jones estimates of an additional 200,000 nonfarm payrolls in December and expectations for a market slowdown.
A strong job market defies widespread recession claims and acts as a catalyst for a risk-on rally. The Consumer Price Index (CPI) reading for December, due out on January 12, will play an important role in either establishing the newly formed bullish sentiment or returning to negative sentiment.
If inflation continues its downward trend, if the CPI print is below 7.7% in December, then the market’s confidence for a soft landing may increase. However, if inflation rose in December, then the chance of a higher interest rate hike at the US Federal Reserve’s meeting towards the end of January rises, creating the risk of a sharp correction.
Traders are looking for permanent swaps with negative funding rates
As spot trading volume and liquidity in cryptocurrency exchanges dried up towards the end of the year, especially during the holiday season, futures markets gained more leverage in price movements. An adverse price reaction to a tight trading position is highly likely.
Solana’s recent rise in prices is clear evidence of short-term price suppression. Over the weekend, $200 million of SOL shorts were canceled as the price rose more than 27% from $13 on January 6. According to independent market analyst Alex Kruger, “SOL still has a ways to go, but the outperformance phase is largely behind us.”
Although Solana’s pump is close to running out, most traders are still net weak on multiple altcoins such as Apecoin (APE), Tron (TRX), Bitcoin Cash (BCH) and Gala Games (GALA). This allows buyers to push the price up and hunt the stop-loss liquidity of permanent swap sellers.
Meme coins are pumped, then jump
In the first week of January, a Solana-based memecoin called BONK experienced a massive 25x increase. The run-up symbolized the degenerate gambling spirit prevalent during the 2021-2022 bull run. On the other hand, bear markets encourage caution among traders.
Despite the recent collapse of BONK’s price, the successful pumping and dumping of meme coins shows that some traders are still involved in high-risk games.
Positive technical breakout
The market capitalization of altcoins exceeded the 50-day exponential moving average (EMA) and amounted to $465 billion. Buyers are likely to target the 100-day EMA at $563 billion – an average expected gain across tokens of 20%. Technical traders will try to touch these key levels before a reversal begins.
The relative strength indicator (RSI) for the altcoin market capitalization also moved above the 60-point resistance and moved into bullish territory. Furthermore, if buyers establish support above the 50-day EMA with positive volumes, the short-term upside may extend to the end of Q1 2023.
Historical trends and positive sentiment are rising
The sustainability of the bullish altcoin run is questionable, especially since the main trend remains bearish. The main catalyst supporting this bull run is difficult to identify, and Bitcoin price is trading below its resistance between $18,200 and $19,000. So the uptrend will fade as the buyers run out.
Looking back at previous crypto cycles, altcoins outperformed Bitcoin in the bull run, and the next cooling period saw a crossover with Bitcoin leading the gains in the crypto market.
The recent parabolic run of 2021 played out the same way, with altcoins outperforming Bitcoin. However, the correction period did not see the altcoin market wipe out relative to Bitcoin.
Both altcoin market capitalization and Bitcoin price have lost 75% of their value since the peak, in contrast to altcoin losses that outstripped Bitcoin.
An exception to the above rule may be due to Ether’s increasing dominance in the market. Ethereum maintained its market lead of about 20%, with technical advances such as the transition to an energy-friendly proof-of-stake mechanism and low inflation, strongly supporting its price despite the negative trend. Still, a deeper correction in the broader altcoin market cap cannot be ruled out.
Recently, social media circles are witnessing a resurgence of positive sentiment. Sentiment data shows that social media mentions of keywords like “buy dip” and “alt” on platforms like Twitter, Reddit and Telegram. Usually, a positive sentiment rally is the best indicator suggesting a reversal of a bullish price trend.
One of the first obstacles will be to support the price after the removal of short orders. Solana and Cardano, two of the first bullish signs, may provide clues pointing towards the end of the upswing.
If the price of SOL breaks below the support at $14.33 with a simultaneous drop below $0.30 for ADA, this could be a warning sign that the bulls are running out.
Meanwhile, tokens that benefit from a liquid staking derivative story like LIDO may continue to rise until Ethereum core developers implement the Shanghai update. Macro market drivers such as CPI printing and Bitcoin price action will also play an important role in continuing the altcoin bull run.
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