Key Takeaways

Crypto markets have jumped to the start the year off positive macro news
Next inflation reading is out on Thursday, which will cause further volatility
Fight against inflation has long way to go, with investors not out of woods yet
Solana has risen 65% since New Year’s Day, but fell drastically prior and problems remain

After what was, to put it mildly, a rather disappointing year in cryptocurrency in 2022, the new year has jumped out to a positive start.

Bitcoin, Ethereum and all their other friends got ravaged last year, but nine days into 2023 there is green on the board. Let’s look at why this is, and whether we will see more of the same, or if price action will reverse back to the 2022 pain.

Macro provides impetus for crypto run

The single biggest reason for the cryptocurrency jump this year is the same reason that pulled the entire space down last year: macro.

The stock market has had a positive start to the new year. This comes off the back of inflation readings around the globe coming in lower than expected. While there is still a hell of a long way to go in the battle against this rampant cost of living crisis, the latest data has given investors hope that central banks may pivot off their policy of high interest rates sooner than previously anticipated.

After a decade of low interest rates, the world transitioned to a new interest rate paradigm in 2022, as rates were hiked aggressively in response to the inflation crisis. This was aimed at reining in demand and ultimately spiralling prices. As a result, all risk assets peeled back, and there is nothing riskier than crypto. So, down the market went.

Solana decouples from market

Of course, while macro is clearly the big driver here, there still remains idiosyncratic risk and happenings in the crypto space. Look no further than last year, when three events (Luna, Celsius and FTX) caused large dropdowns and deviations from the stock market, which otherwise displayed extremely high correlation with Bitcoin.

To start the year, we have seen Solana streak out ahead of the crowd, printing a remarkable 65% return thus far, having opened the year at $10 and now trading at $16.50.

I wrote a piece last week diving deep on Solana, but suffice it to say the coin has big problems. Between repeated outages, has seen several big projects flee the blockchain and has also suffered as a result of its close ties with the disgraced Sam Bankman-Fired. The below chart shows that while this rebound seems large at 65%, it is still a drop in the ocean compared to the freefall it has experienced.

This rise over the last week may be at least partially attributed to Bonk, the latest meme coin phenomenon which I also analysed last week. We know by now not to read too much into doggy tokens, but nonetheless, the rise has at least eased some of the pain for Solana investors.

What Bitcoin continue to rise?

As for the future, that is anyone’s guess. The next big day is Thursday, when the latest CPI figures are revealed. If inflation in the US comes in softer than expected, you can expect markets to rally upwards on renewed hope.

It really comes down to the same thing it has for the last year: the crypto markets will only meaningfully rebound once the Federal Reserve pivots away from its currently-hawkish interest rate policy.

In turn, the Fed maintains that rates will continue to rise as long as inflation is elevated. With the employment market still tight and core inflation remaining stubborn (the headline rate has partially fallen due to energy prices, whereas core inflation is typically the number that lawmakers focus on), there is still a long way to go.

Ultimately, 2023 in the crypto markets will likely be decided based on what happens with this tussle between the Fed and inflation. Until that much-fantasised-about pivot actually occurs though, it could remain a tough time for digital markets.

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