Will There Be a Santa Claus Rally for Bitcoin, or Will Omicron Crash the Party?

Copper bitcoin coins against a blue background
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Only a few weeks ago, the overall cryptocurrency market was able to surpass a phenomenal $3 trillion in valuation. Prices rocketed following the launch of the ProShares Bitcoin Strategy exchange traded fund (ETF), the first Bitcoin-linked ETF in the United States. The highly anticipated inauguration of the historical ETF boosted investor sentiment and aided crypto bulls in propelling Bitcoin to an all-time high of nearly $68,500.

As a result, 2021 has been a pivotal year for the crypto market, with cryptocurrencies seeing increased adoption by investors, primarily large institutions such as banks and technology companies. Moreover, we also saw Bitcoin become legal tender in El Salvador. This is also a significant milestone for the digital assets, and it may serve as a model for other countries to follow in times to come.

However, recently, with the World Health Organization (WHO) announcing the emergence of the omicron variant of the coronavirus, and Christmas just on the horizon, crypto investors are wondering whether they are likely to see a Santa Claus rally and close the year on a positive note.

Seasonality Effect in Cryptocurrencies

Seasonal effects are not uncommon in financial markets as price movement of assets is not just based on fundamentals but rather general market sentiment and external factors that companies do not have control over. Some of the popular seasonal trends are volatility in markets driven by holidays, earnings announcements, and tax deadlines.

With the end of 2021 rapidly approaching, investors are wondering if they will see a Santa Claus rally in crypto markets. The Santa Claus rally is a rise in financial asset prices that occurs during the final week of December and the first two days of January. It is attributed to a number of factors, including holiday cheer and increased liquidity due to Christmas bonuses.

Bitcoin, in comparison to other financial assets, has a limited amount of data available as it started trading little over a decade ago around July 2010. However, based on the data available, we can still infer patterns and forecast how it will trade in the future. Historical data shows that Bitcoin prices typically rise in the final days of November, but the Christmas season does not appear to have much of an impact on the cryptocurrency.

Current Price Action

Around the Thanksgiving holiday, Bitcoin's price action is typically positive. Despite the fact that digital assets have been rallying in recent weeks, the discovery of a new coronavirus variant has caused panic selling, not just in crypto markets, but in stock markets around the world. The WHO announced last week that a new variant of the coronavirus had been discovered in South Africa. Because its spike protein has undergone multiple mutations, this omicron coronavirus variant is more contagious than the Delta variant and could be more resistant to vaccinations.

Bitcoin prices slumped nearly 9% on Friday and are currently trading around the $54,000 mark. Similarly, Ethereum, the second largest digital asset, dipped nearly 12%, and the Bloomberg Galaxy Crypto Index, which monitors the performance of big cryptocurrencies, slumped 7.7%.

Will we witness a Santa Claus rally in cryptos?

Prior to omicron, a Santa Claus rally in crypto markets appeared feasible, as Bitcoin is now supported by strong fundamentals. However, countries are now moving to tighten their restrictions in order to reduce the number of new cases and prevent the virus from spreading. Flights from a number of countries have already been suspended in the United Kingdom and Israel.

If omicron has a material impact, financial markets around the world will likely be in trouble again, and central banks that are now moving towards easing their quantitative easing measures will likely have to rethink their strategies. This potential upheaval could increase volatility in financial assets and have an adverse influence on cryptocurrencies.

Investors, on the other hand, should keep in mind that the current restrictions and long-term lockdowns are unlikely to occur due to the availability of better treatments and vaccinations, which can potentially be tailored to cater to the new variant as well. As a result, even if crypto markets are temporarily impacted, the long-term outlook remains positive due to strong fundamentals.

Cryptocurrency Fundamentals

Despite a recent drop in investor sentiment, cryptos are supported by solid fundamentals such as increased institutional investor adoption and the launch of Bitcoin-linked ETFs, which will improve access for investors and bring more money into the digital sector.

Investors should understand that the crypto sector is experiencing a rapid surge and expansion due to the need for greater transparency, operational efficiency, and security in traditional financial payment systems. Furthermore, the potential for improving digital payment systems in developing countries is enormous and largely untapped. This is because the majority of the population in such countries is underbanked, and increased accessibility through decentralized and digitally enabled cryptocurrencies would likely enable individuals to use various financial services from anywhere they want.

Because of the aforementioned gap in the traditional financial sector, mega corporations have entered and expressed an interest in providing crypto-related services to their clients. Morgan Stanley, for example, decided earlier this year to launch three new funds that would allow investors to take exposure in Bitcoin. Following in Morgan Stanley's footsteps, other banks such as Wells Fargo, Goldman Sachs, and JPMorgan Chase have also begun to show an interest in providing crypto-linked services, owing to growing demand from their clients.

El Salvador's acceptance of Bitcoin as legal currency, the launch of the ProShares Bitcoin Strategy ETF, and companies like MicroStrategy and Tesla having direct exposure to Bitcoin on their balance sheets are just a few of the significant developments in the space.

The Bottom Line

Overall, investors should be on the sidelines for the time being until we learn more about the omicron variant. If it causes another round of national lockdowns, investors are unlikely to see a Santa Claus rally. However, investors should keep in mind that, due to strong fundamentals, the long-term outlook for cryptocurrencies appears to be positive, and thus any price drop should only be viewed as an opportunity to purchase some digital coins at bargain prices.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Naeem Aslam

I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.

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