As we approach the end of the year, traders are eagerly anticipating a traditional market phenomenon that has been observed for decades – the Santa Claus rally. But what exactly is this mystical event, and can we expect to see it manifest in the cryptocurrency markets?
The Origins of the Santa Claus Rally
In 1972, Yale Hirsch coined the phrase "Santa Claus rally" in his Stock Trader’s Almanac publication. He identified a pattern where the S&P 500 index tended to rise during the final December and early January trading days. This seven-day period has historically yielded positive returns, with the S&P 500 gaining an average of 1.3% since 1950 as of 2020.
Why Does this Happen?
Several theories have been proposed to explain why the stock market tends to perk up at the tail end of the year. One explanation is that investors may be looking to invest in tax-loss harvesting before year-end, selling underperforming stocks to offset capital gains and reinvesting in the market. Alternatively, fund managers might purchase high-performing stocks at year-end to enhance the appearance of their portfolios in annual reports.
Another theory suggests that with many investors on holiday, reduced trading volumes can lead to less volatility and a gradual upward drift in stock prices. While this explanation may not apply directly to crypto markets, it’s essential to understand that institutional participation in the crypto space has increased significantly over the past year, following the Bitcoin (BTC) exchange-traded fund approvals.
Why Does this Apply to Crypto?
Despite its volatility, crypto can be affected by market sentiment and consumer spending during the holiday season. People have gotten their annual bonus, are bored, and have time – it’s the perfect time for a bit of speculation on the market. One theory that applies to the Hirsch model works neatly with crypto: The festive season brings increased consumer spending and a general sense of optimism, which can positively influence market sentiment.
Why a Crypto Crimbo is on the Cards
While traditional stock markets may experience a Santa Claus rally, it’s less clear whether this phenomenon will manifest in cryptocurrency markets. Cryptocurrencies are known for their volatility and 24/7 trading, making them an exception to equities’ seasonal patterns.
However, there is a second trend that can be applied to this model: whether or not the market is in a bull run. It’s safe to say that crypto firmly checks that box right now, thus making a compelling case for a severe rally coming together as the year draws close. In late 2017, for example, BTC rallied by 68% over the two weeks spanning the New Year.
What Can We Expect in 2024?
As we approach the end of 2023, the financial landscape presents a mix of optimism and caution. The global economy has shown resilience, with many sectors rebounding from previous downturns. Consumer spending during the holiday season is expected to be robust, bolstering market sentiment.
However, there are potential dampeners that could affect the market, such as the escalation of global tensions in the Middle East or Ukraine. Despite these risks, barring a major macro event, there’s every reason to expect the current bull market to remain intact.
What Can Traders Do?
In crypto markets, financial freedom comes as a standard. A more intelligent strategy is filling one’s conviction bags before the year-end. Load up on the assets you believe in the most, and then sit back and let the prophecy unfold.
Even if the Santa Claus rally proves to be a damp squib on this occasion, it’s no biggie: The bags investors have accumulated now are likely to stand them in good stead next year as the crypto market continues to grind higher. They don’t have to leave a glass of milk and some cookies out, but there’s no excuse for not being ready for Santa this Christmas.
Conclusion
The Santa Claus rally is a phenomenon that has been observed in traditional stock markets for decades. While its manifestation in cryptocurrency markets is less clear, there are reasons to believe that crypto can also experience a surge in market sentiment and consumer spending during the holiday season.
As we approach the end of 2023, traders should be prepared to ride the wave of optimism and take advantage of potential opportunities that may arise. Whether or not the Santa Claus rally materializes, one thing is certain: the bags investors have accumulated now are likely to stand them in good stead next year as the crypto market continues to grind higher.
About the Author
Gracy Chen is the CEO of Bitget. Before this role, she held executive positions at XRSpace, and was an early investor in BitKeep.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.