Crypto market activity hints at the bull run of altcoins

Key points: 

• Contrary to the Dow Jones estimate for a 200,000 increase in December non-farm payrolls and market expectations for a slowdown, the jobs report showed a rise of 230,000, a 0.2% increase in payrolls.
• Most traders are still net-short a number of altcoins such as APE, TRX, BCH, and GALA. This presents an opportunity to push prices higher and chase stop-loss liquidity from perpetual swap sellers.
• Despite BONK’s eventual price drop, the successful pump and dump of a meme coin like this show that some traders are still playing the high-stakes game.
• The altcoin market cap broke above the 50-day EMA. Buyers are likely to target the 100-day EMA — predicting an average gain of 20% for the altcoins.
• Social media mentions of keywords like "buy the dip" and "bottom" have spiked. Typically, a surge in positive sentiment is the leading indicator of a bullish price trend reversal.

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Despite a disastrous end to 2022, with macro headwinds dimming hopes of a 2023 rally, the start of the new year surprised bears, with bitcoin, ether, and altcoins surging. A period of low volatility in the cryptocurrency market appears to have ended with a breakout to the upside.

The gains of some altcoins such as Lido (LIDO), Solana, and Cardano were particularly notable. The main factors driving the rise of these coins are the upcoming update of Ethereum Shanghai (for LIDO) and the negative funding rate of the futures market, especially SOL. Negative rates mean most traders are holding short positions, giving walking buyers a chance to meet stops. Funding rates for some other tokens remain under short-term pressure.

Additionally, degen gambling has also resurfaced in the new year following the FTX crash in November. The soaring memecoin price is evidence that the spirit of Degen is alive. Technically speaking, the total altcoin market capitalization has passed a key technical resistance level as bullish momentum builds.

While the sustainability of the bull market is in doubt as the general trend remains bearish, the youthful uptrend could still cause some pain for late sellers. The five main factors that affect the price of altcoins are:

Labor market data revives soft landing hopes

Contrary to the Dow Jones estimate for a 200,000 increase in December non-farm payrolls and market expectations for a slowdown, the jobs report showed a rise of 230,000, a 0.2% increase in payrolls.

A strong labor market contradicts prevailing recession narratives and has been the catalyst for a rebound in risk. The December Consumer Price Index (CPI), due on January 12, will help build renewed bullish sentiment or return to negative sentiment.

If inflation continues its downward trend, with CPI below 7.7% in December, the market's confidence in a soft landing may increase. However, if inflation picks up in December, it increases the likelihood that the Fed will raise rates at its late January meeting, putting it at risk of a sharp correction.

Traders are chasing perpetual swaps with negative funding rates

With spot volumes and liquidity drying up on cryptocurrency exchanges at the end of the year, especially around the holidays, futures markets gain more leverage in price movements. There is a high probability of an opposite price reaction to a crowded trading position.

Solana's recent price surge is clear evidence that a short squeeze is driving prices higher. Over the weekend, $200 million worth of SOL shorts were liquidated as the price surged more than 27% from its Jan. 6 low of $13. "SOL still has room to grow, but most of the outperformance is behind us," said independent market analyst Alex Kruger.

The funding rate for SOL perpetual swaps. Source - Coinglass

While Solana’s pump may be coming to an end, most traders are still net-short a number of altcoins such as Apecoin (APE), Tron (TRX), Bitcoin Cash (BCH), and Gala Games (GALA). This presents an opportunity for buyers to push prices higher and chase stop-loss liquidity from perpetual swap sellers.

The funding rate for altcoins across crypto exchanges. Source - Coinglass

Pump meme coin then dump

A Solana-based memecoin called BONK surged 25x in the first week of January. The surge symbolizes the depraved gambling spirit that prevails during the 2021-2022 bull market. Bear markets, on the other hand, tend to encourage traders to be cautious.

Despite BONK’s eventual price drop, the successful pump and dump of a meme coin like this show that some traders are still playing the high-stakes game.

BONK price chart. Source - CoinGecko

Positive TA breakthrough

The altcoin market capitalization broke above the 50-day exponential moving average (EMA) to reach $465 billion. Buyers are likely to target the 100-day EMA at $563 billion — predicting an average gain of 20% for the altcoins. Technical traders try to enter these key levels before the reversal begins.

The relative strength indicator (RSI) of the altcoin’s market capitalization also moved into bullish territory, climbing above the 60-point resistance. Moreover, if buyers establish support above the 50-day SMA on positive volume, the short-term uptrend could continue until the end of the first quarter of 2023.

Total altcoin market capitalization (excluding Bitcoin). Source - TradingView

Historical trends and positive sentiment soar

The sustainability of the altcoin bull run is in question, especially if the underlying trend remains bearish. It's hard to pinpoint the underlying catalysts that support this bull run, with bitcoin trading below its $18,200-$19,000 resistance range. As a result, uptrends can fade when buyers get exhausted.

If we look at previous cryptocurrency cycles, altcoins outperformed Bitcoin during the bull run and then crossed over in the ensuing cooling period, with Bitcoin leading the crypto market gains.

The near-term parabolic trend in 2021 is similar to this, with altcoins outperforming Bitcoin. However, the correction period did not lead to the disappearance of the altcoin market relative to Bitcoin.

Both altcoin market capitalization and bitcoin’s price have fallen by 75% since their peak, in stark contrast to altcoins’ declines more than bitcoin’s.

Altcoins outperform Bitcoin during bull markets. Source - TradingView

An exception to the above rule could be due to the growing dominance of Ethereum in the market. Ethereum has maintained its roughly 20% market dominance through technical breakthroughs, such as a move to an energy-friendly proof-of-stake mechanism and lower inflation, providing strong support to its price despite negative trends. Nonetheless, a deeper correction in the broader altcoin market capitalization cannot be ruled out.

Bitcoin (orange) and Ethereum (blue) dominance over the crypto market. Source - TradingView

Recently, there has been a resurgence of positive sentiment in social media circles. Social media mentions of keywords like "buy the dip" and "bottom" have spiked on platforms like Twitter, Reddit, and Telegram, according to Santiment data. Typically, a surge in positive sentiment is the leading indicator of a bullish price trend reversal.

Social media volume for “buy the dip” and “bottom” keywords. Source - Santiment

The first hurdle after the clearing of short orders will be price support. As two of the first coins to soar, Solana and Cardano could provide clues that the uptrend is over.

If the price of SOL breaks below the support at $14.33 while ADA breaks below $0.30, it could be a warning sign of bull exhaustion.

Meanwhile, tokens like LIDO that benefit from the liquidity-staking derivatives narrative may continue to rise until core Ethereum developers implement the Shanghai upgrade. Macro market drivers such as CPI pressure and Bitcoin price action will also play a key role in sustaining the altcoin bull market.