‘January Effect’ Leads to Crypto Winter Thaw. Is It Temporary?

Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. In today’s edition, Michael P. Regan takes the temperature of crypto’s January hot streak:

Is it over?

It’s often been said that “markets bottom on bad news,” and even a Hollywood scriptwriter couldn’t have written a harsher chapter of news for the crypto market than what we saw in November – the month when FTX went bankrupt and the savings and lending programs at Gemini and Genesis

So it’s tempting to think that this old trader cliche is at work when it comes to the almost 50% rebound in Bitcoin since its two-year low in late November. And who knows, maybe that’s the right take – after all, even “Sam coins,” or tokens linked to FTX’s former CEO Sam Bankman-Fried, have surged following brutal losses in 2022.

But you can’t ignore the fact that crypto’s rally comes amid a wider trend elsewhere in markets that’s involved a two-fisted embrace of some of the riskiest and most speculative trades around following a brutal year. Take crypto’s equity-market cousins, the meme stonks. They’re up almost 20% as a group after a 63% plunge last year, as proxied by the Roundhill MEME ETF. Cathie Wood’s ARK Innovation ETF has rebounded 20% after a 67% plunge last year.

So what is going on? Hard to say exactly, but it sure makes it seem like investors are hoping 2023 will be more like . There’s likely some wishful thinking swirling that the inflation beast has been conquered and the Federal Reserve will soon acknowledge that by flagging an end to their campaign of raising interest rates.

To 84-year-old Jeremy Grantham, the co-founder of investment firm GMO who’s spent more than half a century studying markets, it’s all the same story when it comes to highly risky assets: “More likely to me this is merely crypto’s usual style of behaving like the most speculative stocks, almost all of which had a terrible 2022.” According to a new note from him, some investors likely are piling back into the most-beaten-down stocks because they have just finished year-end tax-loss selling and have those proceeds in hand, along with year-end bonuses and even some remaining stimulus money.  He says it’s part of the “January effect” in markets and, while Grantham’s track record is far from perfect, he’s seen enough Januarys to spot a trend.

It makes sense that the January effect would be more pronounced this time, considering what a brutal year 2022 was for almost every manner of investment. As such, it makes sense to wait a bit longer before consulting any groundhogs to determine whether this crypto winter is truly over.  

Charting it out

Hearing them out

What we’re reading (and writing)

• Crypto Chaos Snags Wall Street’s Lender of Last Resort
• Sam Trabucco, a Roxbury Latin and MIT Grad, Got Rich Trading Crypto. Now He’s the Odd Man Out in the FTX Saga (Boston Globe)
• Crypto Lending Teeters on Brink of Extinction After Genesis Collapse
• Binance Acknowledges Storing User Funds With Collateral in Error
• The Unknown Hedge Fund That Got $400 Million from Sam Bankman-Fried (New York Times)
• The Crypto Crackdown Is Just Getting Started (Bloomberg Opinion)

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— With assistance by Tanzeel Akhtar