Cryptocurrencies are seeing some green early in the year after being in free fall for the better part of 2022. The sector is showing signs of bottoming out as oversold conditions make most of the digital assets highly attractive on the risk reward front. The MVIS CryptoCompare Digital Assets 100 Index, which gauges the performance of the top 100 cryptos, is already up by more than 7% for the month.
The crypto benchmark has already outperformed global stocks, which are up by about 2%, bonds by about 1%, and gold by up 3%. Cryptocurrencies outperforming the overall market comes on the heel of a tumultuous 2022 that saw most cryptocurrencies lose more than 60% in market value. While there is some light at the end of the tunnel after the steep sell-off, established coins are not leading the bounce backs.
Investors and traders are increasingly paying close watch to smaller coins whose valuations seem reasonable. Solana is one of the coins up by more than 60% for the year after going down by more than 90% last year. The coin came under immense pressure as the Terra stablecoin collapsed, and FTX exchange implosions rattled the market, fuelling a sell-off wave.
Ethereum is another coin attracting some interest in the market, up by about 11% for the year after falling 67% last year. The bounce back could be attributed to investors taking note of an upgrade on the Ethereum blockchain, which is poised to make it a preferred developer’s platform. An upcoming upgrade dubbed Shanghai, expected to allow investors to withdraw Ethers locked, is another important event likely to continue offering support to the coin. Bitcoin on the other hand is up by about 2% for the year.
Coins offering high staking rewards allowing investors to generate significant passive income on the side are also on the move as optimism slowly creeps back into the industry. StakeWise (SWISE) is up 113%, Lido DAO is up 107%, and Rocket Pools RPL is up 21% as liquid staking tokens continue to outperform.
High Interest Rate and Recession Risks
Last year Cryptocurrencies were on the receiving end as demand for riskier assets subsided amid elevated inflation levels. Furthermore, the US Federal Reserve’s hiking interest rates at the fastest pace in decades resulted in the US dollar strengthening across the board, putting pressure on cryptocurrencies.
Nevertheless, cryptocurrencies could come under pressure amid the growing risk of the global economy plunging into a recession. With interest rates rising at the fastest pace in decades, there is growing concern that an economic slowdown could come into play. As a result, borrowing costs have increased significantly, a move likely to affect companies’ and individuals’ ability to access cheap capital that they can use to invest in alternative assets like cryptocurrencies.
Additionally, the high-interest rate environment makes bonds and treasures highly lucrative as yield assets, which could force investors to shift to these asset classes. However, with most cryptocurrencies trading at levels not seen in years, many investors are likely to invest in them to take advantage of the highly discounted levels.