Crypto Santa Claus rally: Catalysts in 2023/2024
The stock market delivers its own Christmas miracles — bullish runs starting shortly before December 25. Bitcoin has also had its share of Santa Claus rallies, so is another one in the cards this year?
❄️ What is Santa Claus rally?
Like the Thanksgiving effect, “Santa Claus rally” is a buzzword borrowed from stocks. Stock prices tend to rise in the week leading up to Christmas or between Christmas Day and January 2.
The term was coined by Yale Hirsch in 1972. The founder of Stock Trader’s Almanac referred to a period of seven trading days: the last five days in December and the first two days in January.
Today, “Santa Claus rally” is used more broadly — for asset upticks from December to mid-January. For example, Bitcoin’s surge to $44k in the first week of December 2023 was described as “an early Santa Claus rally.” The coin revisited its April 2022 level.
🎄 Santa Claus rally for stocks: Fact or myth?
At first glance, traditional markets do lean bullish over the seven-day period, but the evidence is mixed. Here are the key figures for stock performance reflected by Standard & Poor’s 500 (S&P 500).
- Over the past seven decades, the period has brought gains 79.2% of the time.
- Between 1950 and 2022, stock prices climbed 57 times with an average of +1.3%, per Stock Trader’s Almanac’s estimates.
- The 2022–2023 rally resulted in merely +0.8%.
- The week before Christmas Day brings little proof, with outcomes from +5.4% in 2021 to -10.7% in 2018. Between 2002 and 2021, the S&P 500 ended up in the green 13 times, slipped five times, and had two neutral outcomes.
❓ Why does Santa Claus rally occur?
Explanations include the general Christmas cheer and shopping, investors’ holiday bonuses, and tax reduction.
- Wall Street optimism. The holiday spirit appears to make market participants more bullish.
- January effect. Investors may buy stocks in January to capitalize on another perceived seasonal increase. Some spend their year-end cash bonuses or start new investment programs.
- Harvesting losses. Stocks sold at a loss offset the amount of capital gains tax owed from selling profitable assets. This scheme is known as tax-loss harvesting.
- Shrinking trading volume. In January, retail investors take over from institutional peers, who tend to settle their books and vacation. These investors are typically more bullish, while lower volumes cause exaggerated price shifts.
- Embellishing results. Some investors purchase well-performing stocks to improve their end-of-the-year reports.
📈 Santa Claus rally in crypto
Historical analysis of Bitcoin performance between December and January delivers varied outcomes. Uptrends in some years contrast with significant price drops and neutral dynamics.
Technical insights
To see if the phenomenon holds for Bitcoin, CCN’s Andrew Kamsky analyzed a hypothetical trade — buying on Christmas Day and selling back around mid-January.
According to the results, BTC had a Santa Claus rally six times — in 2011–2013, 2019, 2020, and 2022. Yet the average gain of 31% is a striking difference from the average drop of 21% in 2014, 2015, 2017, and 2021.
The market sentiment in crypto is more complex than just fear and greed. Kamsky breaks it down into five categories:
- Euphoria (2010 and 2013). “Buy” action. Extreme optimism brought short-term gains.
- Capitulation (2011, 2014, and 2022). Two “Buys” and one “Sell.” While pessimism triggers selling, some traders and investors “buy the dip.”
- Belief/Denial (2012, 2017, 2020, and 2021). A mix of “Buy” and “Sell.” Despite the overwhelmingly positive sentiment, the market appeared highly unpredictable.
- Optimism/Anxiety (2015, 2016, and 2019). A mix of “Buy,” “Sell,” and “Neutral.” Uneven sentiment correlated with diverse investor behavior.
- Hope/Fear (2018): “Neutral.” Investors hesitated as the market whipsawed between the two states.
Thus, the outcomes between 2010 and 2022 varied, but the coin was in the green more often than in the red (six times against four).
🟢 Bitcoin Santa Claus rally 2023/2024: Drivers to watch
We have already seen an early December rally driven by optimism around the approval of spot Bitcoin ETFs and the Fed’s monetary easing. Bitcoin is also bolstered by the anticipation of its April 2024 halving.
As of December 14, 2023, BTC is up 159% YTD at $42,937.28. The year has been even more successful for crypto-linked stocks, with Coinbase, MicroStrategy, Riot Platforms, and Marathon Digital gaining over 250% by December 1.
Some analysts have gone so far as to forecast a six-digit BTC price in 2024. Will there be another rally in the coming weeks? The main catalysts would be essentially the same:
ETF approval
Bloomberg Intelligence suggests a 94% probability of the first spot Bitcoin ETFs being approved by January 10, 2024. The SEC has 12 applications to review, including those from BlackRock, Fidelity, and Valkyrie. Meanwhile, ARK Invest and 21Shares have applied for the first spot ether ETF.
Spot ETFs are expected to drive demand and capital flows from institutions. Furthermore, structural changes to BlackRock’s proposal make it appealing for Wall Street banks that cannot hold crypto directly.
Bitcoin halving
Bitcoin halving slashes the mining rewards every four years, reducing the amount of newly minted coins. This squeeze on the supply side acts as a bullish driver. Over the 12-month periods after the 2012, 2016, and 2020 halvings, BTC soared 8,069%, 284%, and 559%, respectively.
Macro background
The final FOMC meeting in 2023 left the fed funds rate steady at 5.25%-5.5%. What’s more, it set the table for three cuts in 2024. As the Federal Reserve opts for easing, crypto stands to benefit.
Higher rates have traditionally supported the US dollar, making risk assets less attractive. Lower rates translate into cheaper borrowing across the board and a lower expected return on government bonds and other “safer” investments.
The Fed’s rate is one of the many drivers and unknowns that may boost BTC’s price. Given the global economic uncertainty, events reinforcing its “safe-haven” reputation may provide a strong impetus.
Sentiment
As of December 14, the Fear and Greed Index — a popular gauge of crypto market sentiment — has reflected greed for over a month. With the halving and ETF approvals on the horizon, Bitcoin appears poised to end the year on a high note.
According to Kamsky, the market experienced “optimism/anxiety” in early November. On December 6, market strategist Jamie Coutts noted that Bitcoin was entering the “belief/denial” zone, when “25–30% pullbacks can start appearing regularly.” This means we can see both “Buy” and “Sell” action, based on past data.
💡 To sum up
- The Santa Claus rally, which may last from the final week of December to mid-January, is an anomaly without guarantees. While stocks mostly saw upticks from 1950 to 2022, Bitcoin’s results were less convincing.
- Apart from the market sentiment, Bitcoin and other cryptos react to miscellaneous external factors, from inflation and regulations to tech advancements.
- Yet, the sheer number of future bullish events provides a strong case for a Bitcoin rally in 2023/2024.
