Despite Signs of ‘Crypto Spring’ Analysts Say Too Early to Call

As the frost of crypto winter slowly melts, industry participants are beginning to feel the warmth of awakening optimism and excitement.

Renewed interest in certain sectors of the industry including NFTs and DeFi has begun to pick up, despite regulatory headwinds persisting into the new year.

The rally in digital assets, epitomized by bitcoin (BTC) and ether (ETH) posting 30% gains since the beginning of the year, is a promising development, some analysts say.

According to Lachlan Feeney, CEO of Australian blockchain consultancy Labrys, the crypto industry’s reputation took a pounding last year. He believes the technology itself was not fundamentally flawed; instead, the misbehavior of centralized actors was to blame.

“Consumers might be wary and skeptical of cryptocurrencies after a horrific 2022, but we believe the industry is in a healthy and exciting place,” Feeney said. “Most of the leverage in the system has been flushed, scams and unscrupulous individuals and companies have been found out while all serious players remain.”

The collapse of certain CeFi platforms emphasized the value of self-custody, which will lead to more on-chain activity in the future, Feeney added..

Altcoins, stablecoin flows and Fed expectations

Altcoins including Stacks (STX) and The Graph (GRT) posting gains northward of 200% year-to-date is “a good sign” that the industry may be in the “early innings” of a crypto spring, Dhruv Patel, CEO of fintech firm Arch Lending told Blockworks.

That’s coincided with a 25% decline in stablecoin reserves held on exchanges from November, data provided by CryptoQuant show.

When the amount of stablecoins being held in reserve decreases, it typically indicates higher buying pressure.

“Many crypto enthusiasts and traders have been increasingly interested in investing at the dip which is fueling an aggressive price increase,” Patel said.

He cautioned that the impact of broader macroeconomic uncertainty combined with lingering inflation and future rate hikes meant it was still too early to call an end to the downward momentum “for certain.”

The Federal Reserve has indicated that further rate hikes will be necessary to bring inflation under control.

That could taper any short-term upside moves, according to Giles Coghlan, chief market analyst and consultant for UK-based Forex and CFD Provider HYCM.

“Bitcoin tends to track the tech-heavy Nasdaq due to the fact some very large institutional holders of the cryptocurrency tend to allocate their crypto and tech holdings together,” Coghlan said.

Similarly, a strong US dollar — which would get a lift from Fed aggression — would also create a headwind for bitcoin, he said.

According to Coghlan, holders of the asset are still vulnerable to the actions of the Fed, as tech stock performance is largely influenced by the central bank’s stance on interest rates. 

“This results in heightened risk for investors.”

A decrease in inflation and a subsequent reduction in interest rates could result in renewed interest in bitcoin from both retail and institutional investors, he said.

Patel agrees, adding it is probable that investors are in a wait-and-see mode, anticipating developments from upcoming FOMC meetings and CPI data prints before making any further investment decisions.

Still, the fact bitcoin was holding up at its mark just below $25,000 is a “positive sign,” particularly given its range beneath $20,000 at the start of the year, he said.

“There’s a lot of reason to be optimistic,” Feeney added. “And [Ethereum’s] Shanghai Upgrade is the next of those.”