Will there be a Santa Claus Rally for Cryptocurrencies this Christmas?

December 29, 2021

As companies wind down for the year, settle their books and go off for the holidays, it is time for crypto holders to ask the question: Just how much will my holdings grow?

The Santa Claus rally refers to the tendency for prices to increase over the last weeks of the year into the new year. That is, from late December to early January.

There are a great many speculations concerning the existence of the rally. This includes increased holiday shopping, optimism fueled by the holiday spirit, or investors simply ‘settling their books’ before heading off for the holiday season. Regardless of the reason, more than two-thirds of December dating back to the 1960s (at least in the stock market) have resulted in favourable gains for stockholders. However, just like any other market anomaly, this trend might be random, and there is no guarantee it will occur this December.

2021 has certainly been a pivotal year for the crypto market. There has been an increase in the number of investors adopting the asset from retail to large institutions such as banks (Commonwealth Bank of Australia; DBS Singapore) and technological companies (Tesla). 2021 also saw Bitcoin becoming a legal tender in El Salvador.

Seasonality Effect in Cryptocurrencies

Despite its growth, there have been fluctuations year-round driven by market developments regarding Tesla’s acceptance of crypto payments, former Twitter CEO Jack Dorsey’s endorsement of Bitcoin, the COVID-19 pandemic, and governmental regulations. Cryptocurrencies have been amongst the most volatile of financial assets (although this is not exactly news for crypto investors).

The father of cryptocurrency Bitcoin only began trading a little over a decade ago and only in recent years has gained acceptance as an asset class for investors. Nevertheless, one can still infer patterns and create forecasts as to how it will trade in the future. Historically, Bitcoin prices rise during the final days of November but are not heavily impacted by the festive December period.

Around the Thanksgiving holiday and before the Omicron variant, a Santa Claus rally appeared to be attainable. Nevertheless, the panic selling, triggered by the discovery of a new coronavirus variant, has produced a slump of nearly 9% for Bitcoin prices. Bloomberg’s Galaxy Crypto Index, which monitors the top-performing cryptocurrencies have also slumped 7.7%.

Strong Fundamentals

The recent drop in investor sentiment does not automatically imply the unlikelihood of a Santa Claus rally. As noted, 2021 was a year of ever-expanding adoption. Investors all around the world are pushing for greater transparency, operational efficiency and security in traditional investing – all of which are provided by cryptocurrency. There is also an urgency to tap into the underbanked and unbanked markets, all of which are provided by cryptocurrency’s decentralized nature.

All in all, there are external factors that come into play in regards to the plausibility of a Santa Claus rally. Investors will have to hone in on the material impact of the new Omicron variant. The possible tightening of government regulations and lockdowns imply a less favourable outcome. Nonetheless, the strong precedent of crypto fundamentals may denote that the long-term outlook for digital currencies is positive.

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