Historically, a Santa rally happens in the weeks leading up to Christmas when a collective sense of goodwill bleeds into equity markets. This is typically a seasonal blip and nothing to write home about. But this year, we could see a far more significant rally as the United States Federal Reserve, the Securities and Exchange Commission and BlackRock line up to deliver a bonanza of holiday cheer.
The Federal Open Market Committee (FOMC) finished its penultimate meeting of 2023 on Wednesday, and it decided to hold interest rates steady. As we know, U.S. inflation has been tamed from a high of 9.1% in June 2022 to its current level of 3.7% thanks to the Fed’s aggressive interest rate hiking cycle that brought the Federal Funds Rate to 5.25-5.5% — its highest level since 2001.
However, while this campaign has been unquestionably successful, markets remain deeply concerned about the potential of higher rates, or even rates sustained at this level, to trigger a recession in the U.S. The Fed also now shares these concerns as it softens to some degree against inflation.
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Should the next Bureau of Labor Statistics inflation reading on Nov. 14 show a move downward, we can expect to see money flooding into risk assets as investors anticipate the next interest rate decision to be a cut. This will, of course, have a positive impact on equity markets, and even bond markets as yields fall and the back end of the yield curve flattens.
GUNDLACH: THINK CPI WILL COME DOWN BASED ON INFLATION MODEL— *Walter Bloomberg (@DeItaone) November 1, 2023
Crypto markets will follow suit, with Bitcoin (BTC) remaining strongly correlated to main markets. What will provide an extra shot in the arm, though, will be the approval of the first U.S.-based Bitcoin spot ETF — which is likely to come before Jan. 10, as J.P. Morgan predicts. This is underlined by the excitement that rumors of the approval of BlackRock’s application have generated over the past few weeks, which sent Bitcoin back up to $35,000: a level it hasn’t enjoyed since the pre-Terra Luna days of 2022.
Eventual approval will provide further impetus for Bitcoin, Ether (ETH), and large swathes of altcoin markets. However, if investors are following the old adage, “buy the rumor, sell the fact”, it may not be huge. We might even see a small dip before a more sustained rally. There is little doubt, however, that approval will be positive for cryptocurrency. Indeed, longer-term it has the potential to be the greatest driver of crypto markets since the conditions created by the Covid pandemic saw BTC top $60,000 in 2021.
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Potential spanners in the works include higher inflation in the U.S. before the end of the year, and potentially a ramping up of tensions between Israel and Palestine. Either of these could put the brakes on an end-of-year Santa rally — but that does not seem to be the direction of travel right now.
Indeed, Bitcoin has already enjoyed quite a rally this year. While the fallout from the FTX crash in November 2022 saw BTC fall to the $15,000 range and start 2023 at a paltry price of slightly more than $16,000, its level today of $34,000 to $35,000 represents growth of more than 100%. Of course, it’s only the very smart or lucky traders who ever manage to take advantage of Bitcoin’s extreme volatility. Year-on-year, many crypto investors are still nursing losses.
For FTX investors, for example, while there are now hopes some will get their Bitcoin, Ether, and other tokens back, most will face somewhat of a Pyrrhic victory as they stare down the barrel of 60% to 70% losses. This accounts for the generally pessimistic mood in the crypto market, which would otherwise look like the winner of 2023.
As we approach the end of the year, then, it would do all of us well to take a step back and view Bitcoin and crypto markets with fresh eyes. Even if we don’t get a much anticipated and, perhaps, deserved Santa rally, we can celebrate the fact that crypto has survived another challenging year and is ending on a high.
Lucas Kiely is chief investment officer of Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He was also the head of exotic derivatives at UBS in Australia.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.