What happened

The crypto winter suddenly thawed starting late on Friday as tokens across the industry shot higher. I highlighted some of the major cryptocurrencies moving earlier, but some big-name altcoins are popping as well. And there may be a good reason.

Polkadot (DOT -5.89%) is up 15.7% in the last 24 hours as of 5:00 p.m. ET, NEAR Protocol (NEAR -6.50%) is up 21.1%, and Tezos (XTZ -3.52%) has jumped 13.4%.

So what

The macro market environment can't be overlooked in crypto trading lately. Inflation data this week showed that prices in the U.S. actually fell month over month in December, leading investors to think rate hikes may end sooner than expected. Stocks rallied, and riskier assets like cryptocurrencies did as well.

On a more substantial level, the U.S. House of Representatives announced a Subcommittee on Digital Assets, Financial Technology, and Inclusion, which will be under the House Financial Services Committee. Lawmakers have been talking about regulating cryptocurrencies in a more meaningful way, and this is an early sign that new Republican leadership may be serious about it.

Indications of regulation have been met with cheers by crypto traders over the past year but haven't led to much. I think altcoins like Polkadot, NEAT, and Tezos -- with the blockchain fundamentally built to build utility -- would be in great positions if there were more regulatory certainty.

From a trading perspective, crypto is in a relatively low-volume environment, which means there's not a lot of liquidity (buyers and sellers). When values started to move higher, it caused a run that shocked the market and led to liquidations of short positions. In the last 24 hours alone, there have been $624 million of liquidations in crypto across major tokens and altcoins. This short squeeze is like fuel to a crypto rally.

Now what

Cryptocurrencies continue to be extremely volatile and risky, but developers continue to build real utility around the blockchain as well. Long-term, the new businesses and payment solutions should drive cryptocurrency prices higher, but that doesn't mean the ride will be smooth.

I think the pop in the last day has been driven by a sentiment recovery after FTX's collapse. When FTX went into bankruptcy, it was clear that billions of dollars in assets would need to be liquidated, or sold, and that would drive crypto prices lower. Traders got out in front of that move, but this week, it was reported that $5 billion in cash and cryptocurrencies had been recovered, some of which was from selling leveraged positions. If the deluge of selling is over, buyers may step back in.

The market rally may last, and it may fade, but there does seem to be a sentiment change in both the stock market and crypto. A slower increase in interest rates would be positive, and there's clearly a lot of leverage that has already left the ecosystem. But it will be a volatile ride, even if the future is bright.