While 2022 ended on a gloomy note with macro headwinds offering little hope of a 2023 revival, the start of a new year surprised bears with a surge in Bitcoin (BTC), Ether (ETH) and altcoin. The period of low volatility in the crypto market seems to be ending with a bullish breakout.
The rise has been particularly striking in some altcoins such as Lido (LIDO), Solana (SOL) and Cardano (ADA). The main factors promoting the rise of these coins are the upcoming Ethereum Shanghai update (for LIDO) and the negative funding rate in the futures market, especially for SOL. Negative rates imply that most traders are short, providing an opportunity for whale buyers to execute their maximum losses. The funding rates of some other tokens remain exposed to a short contraction.
In addition, the new year has also seen the resurgence of reckless gambling that had faded to the background after the FTX crash in November 2022. The rise in the price of meme coins is proof of the residual degen spirit. Technically, the total altcoin market capitalization has breached a key technical resistance level as bullish momentum builds.
While the sustainability of the bull run is questionable as the overall trend remains down, the nascent uptrend could still cause late sellers some pain. The five main factors that influence altcoin prices are:
Labor market data rekindles hope for a soft landing
Defying the Dow estimate of 200,000 nonfarm payrolls and market expectations for a slowdown, labor market data for December 2022 showed an employment increase of 230,000 or 0.2%.
A strong labor market goes against prevailing claims of a recession and acts as a catalyst for a risk rebound. The December 2022 Consumer Inflation (CPI) price reading due to be released on January 12 will be critical to taking advantage of the new bullish sentiment or returning to negative sentiment.
If inflation continues its downward trend, with the December CPI below 7.7%, then market confidence in a soft landing could increase. However, if inflation picked up in December, then the chances of further rate hikes at the US Federal Reserve meeting towards the end of January risk a sharp correction.
Traders look for perpetual swaps with negative funding rates
As spot trading volume and liquidity on cryptocurrency exchanges dried up towards the end of the year, especially during the holiday season, futures markets gained more influence on price movement. A contrary price reaction to a crowded trade position is highly likely.
The latest increase in Solana’s prices is clear evidence that prices are being pressured in the short term. Over the weekend, $200 million worth of SOL shorts were liquidated as their price rose more than 27% from the January 6 low of $13. According to the market analyst independent Alex Kurger, “SOL still has room to move forward, but the top performance phase is mostly lagging behind.”
While the Solana rally might be close to over, most traders are still net shorting numerous altcoins like Apecoin (APE), Tron (TRX), Bitcoin Cash (BCH) and Gala Games (GALA). This provides an opportunity for buyers to increase the price and seek stop-loss liquidity from perpetual swap sellers.
Meme coins go up, then down
In the first week of January 2023, a Solana-based meme coin called BONK saw a 25x rise. The rise symbolized the degenerate gambling spirit that prevailed 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 hit coin pump and dump game meme suggests that some traders are still indulging in high-stakes gaming.
Positive technical breakdown
The altcoin market capitalization broke above the 50-day EMA at $465 billion. Buyers are likely to target the 100 day EMA at $563 billion, an expected average gain of 20% across all tokens. Technical traders would look to take advantage of these key levels before the reversal begins.
The relative strength indicator (RSI) for the altcoin market cap has also moved into bullish territory, rising above 60-point resistance. Furthermore, if the buyers build support above the 50 day EMA with positive volumes, the short-term uptrend could extend towards the end of Q1 2023.
Historical trends and peak positive sentiment
The sustainability of the altcoin bull run is questionable, especially as the underlying trend remains bearish. It is difficult to identify the fundamental catalyst supporting this bull run, and Bitcoin price is trading below the resistance between $18,200 and $19,000. Therefore, the uptrend will likely fade as buyers dry up.
If we look at previous crypto cycles, altcoins outperformed Bitcoin in a bull run, and the following cooldown period saw a crossover with Bitcoin leading the cryptocurrency market gains.
The recent parabolic run of 2021 played out in a similar fashion, with altcoins outperforming Bitcoin. However, the correction period has not seen a wipe out of the altcoin market relative to Bitcoin.
Both the altcoin market cap and Bitcoin price have lost 75% of their value since the peak, as opposed to altcoin losses outpacing Bitcoin.
An exception to the above rule may be due to the increasing dominance of Ether in the market. Ethereum has maintained its market dominance at around 20% with technical advances such as switching to an energy-friendly proof-of-stake mechanism and lower inflation strongly supporting its price despite the downtrend. Still, a deeper correction in the broader altcoin market cap cannot be ruled out.
Lately, social media circles have been witnessing a resurgence of positive sentiment. Santiment’s data shows that social media mentions of keywords like “buy the dip” and “fund” skyrocketed on platforms like Twitter, Reddit and Telegram. Generally, a positive sentiment spike is a top indicator that suggests a reversal of the uptrend in price.
One of the first hurdles will be maintaining the price after the removal of short orders. Being one of the first tokens to emerge, Solana and Cardano could provide clues that point towards the end of the uptrend.
If the price of SOL falls below the support at $14.33 with a concurrent drop below $0.30 for ADA, it could be a warning sign of bull exhaustion.
At the same time, tokens like LIDO that benefit from the narrative derived from liquid staking could continue to rise until the Ethereum core developers implement the Shanghai update. Macro market drivers such as the CPI print and Bitcoin 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, readers should do their own research when making a decision.