Seasons change – How will the Crypto Markets perform in January?

Seasonal effects are commonplace in financial data sets. The prices of commodities change because of the shifts in temperature between the summer and winter months. The prices of stocks are affected by the annual earnings season and the Christmas holiday period.

The digital asset class is no different. It’s true there is only about 10 years of data to draw from, but even so, there are a range of observations that can be made around what Bitcoin and the rest of the crypto markets do during particular months or quarters of the year.

For example, digital assets still react to impending tax seasons and holidays like Chinese New Year. To close 2021, Brave New Coin explores the historical price performance of Bitcoin and Ethereum in January to see if any emerging patterns can add information to crypto trading and investment strategies in the new year.

Bitcoin in January

January has historically been a positive month for Bitcoin. Over the last 11 years, on average, the price of BTC has risen by ~11.2%. While these gains appear impressive, January is certainly not Bitcoin’s best historic month. Historical gains in February, April, May, June, October, November, and December are all higher.

The weekly returns for Bitcoin by year indicate that the first week of January tends to be the best week of the month for the asset. This implies that Bitcoin’s gains in January may also be driven by the aftershocks of gains in December, which is generally a very strong month for BTC.

In the second half of January, historically, BTC’s gains begin to slow down.

Source: Coinglass.com

The start of the year. A difficult time for Bitcoin?

A potential reason for BTC’s difficult end to January is the Chinese New Year sell-off. The Lunar Chinese New Year generally occurs in early February. In 2021, it occurred on February 12th, the year before it occurred on January 25th. In 2018 it happened on February 16th and there was a significant BTC sell-off in the week leading up to the Asian holiday. In 2022 it will occur on February 1st.

China has historically been a hotbed for Bitcoin and cryptocurrency investment and production activity. Up until September 2019, 75% of the Bitcoin network’s hash power electricity consumption was sourced from China. Chinese-centric trading platforms like Binance, OKEx, and Huobi dominated the crypto trading space until a government clampdown forced them to shift overseas.

Source: Cambridge Bitcoin Electricity Consumption Index

During the Chinese New Year celebration, it is the traditional practice for friends and family members to give each other ‘Red packets’. These are red envelopes filled with cash. This is a very specific and widespread practice in China and amongst the Chinese Diaspora.

The intuition for why this period is bearish is because Chinese crypto holders sell crypto holdings for cash in the lead up to Chinese New Year so that they have something to put into red packets.

Unlike in 2018, however, where we saw a significant dump in the price of BTC in the lead up to the Chinese New Year, in 2021 Bitcoin enjoyed healthy gains as Chinese New Year approached.

A reason for this may be because the new year in 2021 led into the ‘year of the Ox’. The Ox, because of its connection to the bull, may have sent signals to the superstitious Chinese trading community that the incoming year was set to be bullish for BTC. Chinese new year in 2022 will lead into the year of the Tiger.

The other factor for why the Chinese new year had less of a bearish impact on markets is because China is simply less of a force on the crypto market than it once was. Between 2011-2018 it was an open secret in the industry that the biggest drivers of price movements in crypto were the investment decisions of Chinese retail traders and miners. The impact of events like a new regulation of crypto investments in the country would have a severe price impact on the digital asset market.

In more recent times, however, institutional traders in North America and Europe have had more of a say in the price movements of Bitcoin. Events like the launch of the North American Bitcoin ETF are having a more direct effect on the prices in crypto markets because more of the money in crypto is controlled by American institutions and funds.

Chinese influence on crypto has waned because of government bans on the digital asset class. There are now black and white rules in the country that ban activities like mining, trading, and over-the-counter transactions.

China’s crypto infrastructure has been crippled over the last few years. The mining companies, exchanges, and trading desks that were abundantly available to mainland China citizens are now banned with the threat of criminal charges if they continue to operate in the country. Because of this, China has much less of an influence on the price of Bitcoin and crypto markets.

Chinese New Year and red packets may affect crypto markets because the influence of China on crypto has not completely evaporated but selling pressure from mainland China is likely less of a negative impact than it once was.

Source: Twitter user @ultravirtu

In December 2021, we saw a pattern of extreme sell pressure from Asian traders. Data provider Glassnode reports that during Asian working hours, there was a spike in selling pressure compared to during European and US working hours.

This suggests that the most recent downturn in crypto markets has been driven by bearish sentiment from Asia. This may be driven by factors like the Evergrande debt crisis and concerns surrounding the spread of the Omicron COVID-19 variant. Another apparent factor behind this increase in selling pressure is the aforementioned increase in regulation and the clampdown in crypto ownership and activity in China.

A silver lining is that this Asia-specific selling pressure appears to be decelerating but with Chinese New Year an Asian holiday, the trend of heavy selling pressure from Asia before the new year is concerning nonetheless.

Ethereum price performance in January

Source: https://ethereummonthlyreturn.com/

While January has historically been a middling month for BTC returns, it tends to be a blockbuster month for Ethereum (ETH). The average return for Ethereum in January since its launch is 36.8%. This average return is only bested historically by returns in the months of April and May.

Source: Coinglass.com

Weekly data indicates that like BTC, the first week of January tends to be the best week for ETH. Additionally, like Bitcoin, it suffered heavy losses in the week leading up to the Chinese New Year in 2018.

In 2021, the price gains for Ether in January far outstripped those of Bitcoin, 78.37% vs 13.37%, respectively. January 2021 was a period of significant fundamental growth for Ethereum. In December 2020 the network began its shift towards Ethereum 2.0 phase 0.

Ethereum 2.0, also referred to as ETH 2.0 or Serenity, will be an updated version of the existing Ethereum blockchain that is designed to address the network’s limitations while still maintaining its integrity as a decentralized blockchain.

Phase 0 in December 2020 invited Ethereum users and holders to deposit their ETH into a staking contract. The contract eventually launched when a sufficient amount of ETH was deposited into the contract to meet a predetermined decentralization threshold.

The contract was immediately popular and existing Ethereum network participants were happy to lock assets into the contract, despite knowing that they would not be able to touch these assets for an indefinite period of time.

It is more than a year since the launch of Phase 0 and the ETH2.0 staking contract. The Ether committed remains vaulted away. The willingness of users to lock ETH away was a sign of the commitment and long-term belief in the network the Ethereum community has for the network.

In February 2021, on the back of the phase 0 launch of ETH2.0 and a strong January, Ethereum hit a new all-time high above US$1500. Starting from January, the 2nd largest asset in crypto has enjoyed an extended period where it has outperformed BTC. At the start of the year, 1 Ether bought you 0.025BTC, and now it buys you 0.085BTC. This is a ~240% increase in value against BTC in just under 12 months.

January is historically a strong month for Ether and given its recent track record of outperforming BTC, expect fireworks for the asset if it finds momentum during the month.

General market conditions heading into the new year

2021 has been a strong year for digital assets. As an internet-first, easy-to-go-remote industry it has flourished during 2021’s pandemic afflicted global economy when other financial and corporate sectors have struggled.

Cryptocurrencies can be traded from anywhere in the world, at any time. Their digital, permissionless nature also makes them more difficult to regulate or control than other financial assets. The digital asset industry continues to operate without interruption during the pandemic and through any lockdown restrictions.

The smart contract-based Web3.0 and non-fungible token (NFT) sectors have hit a point of maturity in 2021 where they are no longer strangled by issues like UI and high capital barriers to entry.

Alongside the booming Ethereum, Web3.0 based token projects like Solana (SOL), Terra (LUNA), Avalanche (AVAX), and Fantom (FTM) have had exceptionally strong years recording quadruple-digit price gains backed by rises in the total value of assets locked on to their blockchains and volumes on their NFT marketplaces.

Some of the gains these assets have enjoyed can be explained by speculation but in 2021 this sector of crypto has begun delivering on long-held promises.

Worldwide search interest for the term Smart Contract – last 5 years. Source: Google Trends

Worldwide search interest for the term Web3.0 – last 5 years. Source: Google Trends

Worldwide search interest for the term Non-fungible token – last 5 years. Source: Google Trends

Additionally, decentralized cryptocurrencies have acted as highly liquid hedges against political risk. Globally, inflation is hitting new 30 year highs. This is because central banks have turned on their money printers and are supporting economies with newly created fiat.

Governments are using the levers that central banks pull to artificially create more money to spend on infrastructure to support pandemic-affected economies. This increase in money supply combined with supply shocks caused by disruptions in the global supply chain and rising consumer demand as local economies re-open after extended lockdown periods, have caused inflation to rise.

Many cryptos have characteristics of scarcity and nearly all of them are more transparent and decentralized than fiat currencies, making the sector an attractive inflation hedge.

With the normal economy disrupted and inflation hitting record highs across the globe, digital assets enjoyed an exceptionally bullish 2021. Small patches of bearish price pressure were generally accepted as consolidatory and temporary. So far this year, that thesis has been correct and gains have quickly resumed and erased any price drops.

December 2021 has been a difficult month for crypto. In the first three weeks of the month the price of BTC has dropped ~18%. The price of Ethereum is down ~12% and across the altcoin space tokens have pulled back strongly.

Federal Reserve Chairman Jerome Powell announced on December 15th that America’s central bank was going to, more quickly than initially signaled, slow down the rate at which it purchases treasuries and mortgage-backed securities. These purchases were designed to provide corporate America with support during periods of economic slowdown caused by the coronavirus pandemic. This shift in policy is designed to slow down the rapidly rising rate of inflation in the country.

As an inflation hedge, cryptocurrencies’ appeal grew while the US dollar faced stimulus-driven inflation. Additionally, risk asset classes like crypto and equities benefited from an environment of a weakening dollar as investors took their money out of cash and put it into investments that promised higher returns.

The flip to a hawkish policy and a commitment by the Fed towards returning value to the US dollar is driving investors back towards the US dollar and Treasuries in December while pulling money out of risks out of risk sectors like equities and crypto.

The other major driver of bearish momentum in risk markets is the spread of the Omicron variant of COVID19. Every day new cities around the globe are reinstating lockdown restrictions, quarantines, and border closures in an attempt to slow the spread of Omicron.

This threatens to once again destabilize the global economy and GDP. While crypto has previously performed well during the pandemic, because of the uncertainty surrounding Omicron’s effects, investors in the short term, are preferring to stay away from risk and shift funds towards safe assets like treasuries. This is likely to remain the case until we learn more about the new variant and these bearish macro headwinds may persist into January and early 2022.

Asia-specific factors also loom large over the risk markets. The property market in China continues to bleed heavily and the inability of mega-developer Evergrande to handle debt payments continues to threaten to create systemic chaos. Chinese developers are offloading projects to pay back debtors and public investors invested in their equity are suffering.

A black swan event in the Asian equity market would undoubtedly have negative effects on the crypto investment landscape.

The Evergrande situation combined with the continued aggressiveness of Chinese regulators to stamp crypto out of the country could be under the radar headwinds that will weigh down crypto markets in the short term.

Conclusion

January is a historically strong month for digital assets, particularly for Ether and altcoins. Heading into January 2022 markets appear beleaguered and coming down from an exceptionally bullish 2021.

December has been a difficult month for crypto. Some of this bearishness may be prescribed to profit-taking and seasonality, but there are negative macro headwinds dragging markets, and perhaps until these clear, the crypto market will not be able to resume its bull run.

If some of the fog does clear, however, the new year is a period in the past when digital assets have historically boomed. January 2021 and 2018 were bumper months and crypto bulls will be hoping for more of the same in 2022.