This year has barely started and it’s already been good for crypto, with the overall market up about 30%. And, sure, there are caveats here (not to mention a chance of volatile pullbacks in the short term), but when I look at the bigger picture, I see three reasons to believe the crypto market has already bottomed out.

1. It's seen a lot of pain, and appears to be rebuilding.

The market was massively over-leveraged last year. And it wasn’t just retail investors who were trading on margin – i.e. using borrowed money to invest. Giant crypto funds like Three Arrows Capital (3AC) and Alameda Research were leveraged to the hilt. That strategy may work fine when prices are going up, but when they come down, investors are forced to exit their positions in a big way. What’s more, you also had Terra Luna – once a $60 billion blockchain – implode into nothingness in May, as its UST stablecoin lost its peg with the US dollar. A lot of hefty investors were exposed to Terra in some way, with leverage to boot. And there was an interconnected web of crypto lending and borrowing platforms all drinking the same Kool-Aid. Major crypto firms filed for bankruptcy in the summer, including Voyager and Celsius.

But crypto's “Lehman moment” came in November: FTX, one of the biggest digital asset exchanges, went under. As with Terra, there were many huge investors exposed to FTX. That’s when the real panic set in (orange arrow), and bitcoin dropped all the way to $15,500. But more recently, big crypto lenders BlockFi (blue) and Genesis (white) filed for bankruptcy – and when they did, bitcoin held its ground. In fact, it’s now trading back above where it was before FTX went under (yellow dotted line).

Chart drawn with TradingView.

It looks like bad news just isn’t affecting prices like it was before, which could be a sign that the market has already priced in enough pain. It could also be a sign that a lot of the leverage and bad actors have been washed out of the market – and what's left is starting to rebuild.

2. Bitcoin is leading the rally.

Most digital assets tend to follow bitcoin’s lead. And if past bear market bottoms are anything to go by, the king must lead the next charge to victory. That’s mostly because bitcoin is the biggest crypto asset, and it brings the most liquidity into the market. And once its rally cools off, investors can then start taking bigger risks and distributing more of that liquidity into altcoins.

Bitcoin is up about 50% since November, and has gained a 5% share over the rest of the market over that time (bitcoin dominance in percentages, blue line). That’s a lot like what happened in the 2018-19 bottom: bitcoin rallied fiercely as its dominance climbed (gray rectangle). I wrote more about how bitcoin dominance works back in May.

Chart drawn with TradingView.

Even though bitcoin’s price came down last year, the network is looking stronger than ever. Blockchain data shows that more investors are joining the network, and holding onto their coins for the long run. (I wrote all about that here.) We’re also about 62 weeks away from bitcoin’s next “halving” event – where the number of new coins minted by miners per transaction block gets cut in half. As I explained here, these build-up periods have generally been at or around bear market bottoms in the past.

3. The macro narrative is beginning to shift.

Crypto bears had good reason to come out of hibernation last year. We started seeing high inflation for the first time in decades – and an aggressive spree of interest rate hikes aimed at taming it from the Federal Reserve (Fed) and other global central banks. That combination – high inflation, rising interest rates, and a weakening economy – was a ticking time bomb for growth assets like tech stocks and crypto.

But the narrative is now starting to shift. The US yearly inflation rate has been dropping every month since its 9.1% peak in June – and was sitting at 6.5% as of December. Sure, that’s nowhere near the Fed’s 2% target, but if you look at the monthly inflation rates, inflation has actually only increased about 0.9% over the past six months. If you annualize that, assuming the same trajectory, the yearly inflation rate would actually be less than 2%. So while the Fed might be talking a big game about keeping interest rates higher for longer, the market is sensing that policymakers are actually a lot closer to a rate pause than not.

The Fed’s been hoping for a “soft landing” scenario, where it hikes rates just enough to cool inflation but not so much that it pushes the economy into a recession. And while that cushy landing might be in the cards, there’s still a chance inflation could be coming down for the wrong reason – foretelling a collapse in economic growth (i.e. a recession). But, even if that’s the case, I’d say there’s more chance that the Fed cuts rates to jolt the economy – and that could be a good thing for bitcoin and co, too.

What’s the opportunity here?

Obviously there’s no way to know for certain right now whether the crypto market has bottomed. But if, like me, you think there’s a good chance it has, then your best strategy might be simple: buy the dips. Just like bear markets have the occasional rallies, bull markets can have big washout moves to the downside. From a risk-reward standpoint, you’re a lot better off buying those downside moves than FOMO-ing into each rally. As for which investments to go for, here’s a guide to help you pick them.