Are the bulls back, or are they? This has been a question that cautious observers may have started asking themselves over the past couple of weeks, when the cryptocurrency market rose like Phoenix from a total limit of about $942 billion on Friday to $1.022 trillion on Saturday, an 8.5% gain in about a day. In fact, going back to December 20 (when the market was worth around $825 billion), prices have risen by almost 24% on average, with some altcoins (e.g. aptos, decentraland, helium, Frax share, solana) doing even better in recent times.
The fact is that, despite these increases, bitcoin and ethereum (for example) remain 70% and 68% below their respective all-time highs, set in November 2021. So while the arrival of somewhat positive US inflation data has strengthened investor sentiment, it remains highly questionable whether the global economy – and the cryptocurrency market – is not out of the woods yet.
However, with the aforementioned inflation data recently accompanied by positive data from other major economies, it really looks like we have entered the beginning of the end for the crypto bear market of 2022. Of course, with macroeconomic conditions still in a precarious state and with cryptocurrencies potentially facing a series of serious regulatory actions, last week’s earnings could easily be undermined.
US inflation data causes cryptocurrency rally
Thursday, January 12, was a good day for stock and cryptocurrency markets, with the U.S. Bureau of Labor Statistics releasing an update that found that annual inflation had fallen to 6.5% in November, down from 7.1% in October. This has been the main driver of the cryptocurrency market in recent days, with US (and global) stock markets also rising in response to encouraging news.
Yet it wasn’t the only good economic news. The next day, the UK’s Office for National Statistics released data showing that the British economy had actually grown by 0.1% in November, confusing expectations of a contraction. This complemented very similar news from France, which also saw a 0.1% increase in GDP in the fourth quarter of 2022, as well as even stronger data from Germany, which recorded 1.9% growth in economic output for the full year.
There’s also the claim that because bond yields (e.g. US Treasuries) remain around 4.25%, the Fed’s interest rates won’t rise much this year and will likely start to fall as 2023 progresses. This was an argument advanced recently by fixed income veteran Jeffrey Gundlach, among others.
Combined with the rapid decline in oil/gas prices, all of this creates the suspicion of a gradually improving economic picture, which by extension should result in an improvement in the cryptocurrency market. This seems to be the belief of many market observers, with Twitter showing no shortage of people willing to come forward and declare (or at least insinuate) that 2023 is already shaping up to be much better than 2022.
And judging by how prices reacted, you’d be forgiven for thinking that the cryptocurrency market decided that last year’s bear market is over and a bull market is about to begin. Not only did the market as a whole surpass $1 trillion in value for the first time since early November, but a good number of coins saw some very attractive gains above average. Here is a selection of the most important earnings in the last week, at the time of writing.
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Aptos (APT): The Libra/Diem offshoot increased by 111%.
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Decentraland (MANA): The metaverse altcoin increased by 85%.
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Helium (HNT): The currency of the decentralized IoT network gained 63%.
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Solana (SOL): Level one blockchain gained 61%.
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Earth (LUNA): The new version of LUNA has increased by 58%.
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Frax Share (FXS): Native token for decentralized lending platform Frax Finance increased by 55%.
To some extent, many of the above-average artists are simply beginning to catch up with the ground they lost over the course of 2022, with many still well below their respective all-time highs (for example, Solana is still 91% below his all-time high set in November 2021). However, the fact that they have started this process can be considered a very positive sign, with a large number of people within Crypto Twitter going so far as to suggest that a new bull market has just begun.
Clouds on the horizon
However, in the face of such exuberance Devil’s Advocate is worth playing, and quite a few commentators have quickly moved to argue that last week’s gains are not the beginning of the next bull market. For example, for entrepreneur and podcast host (and Bitcoin maximalist) Brad Mills, the current movements represent only the beginning of a long cycle towards recovery.
At the same time, there is likely still a lot of contagion to play from November’s FTX crash, with Silvergate Bank recently facing a bank run in late 2022, as its customers withdrew around $8 billion from the crypto-friendly institution. In other words, the industry could see another big explosion anytime soon, something that would drive prices down again.
At the same time, the industry faces the very real prospect of regulatory action, with the U.S. Department of Justice still considering whether to charge Binance – the world’s largest cryptocurrency exchange by volume – for money laundering violations. This is in addition to the news that Nexo’s Bulgarian offices were raided on January 12, in connection with a money laundering case. On the same date, the SEC accused Gemini and Genesis of selling unregistered securities through their Gemini Earn product, adding further to recent crypto problems.
In light of these actions, it cannot be ruled out that authorities in the US (and potentially elsewhere) are preparing to confront the industry through legal and regulatory means, and with pre-existing cases between the SEC and Ripple (for example), it is likely that they have been doing so for several years already. And speaking of the Ripple case, if it loses its battle with the securities regulator, this could have a very negative effect on cryptocurrency prices.
As such, no one should open Champagne yet. Yes, prices have recovered to some extent in recent weeks, but with the global economy still slowing its decline rather than showing real strength, it would be too premature to conclude that we are entering a new bull market.