Week by numbers
Last week has been an upward trend in the crypto market. The price of the largest cryptocurrency, Bitcoin, rose by about three percent, while the price of the second-largest cryptocurrency, Ether, increased by about eight percent. The combined total market cap of the rest of the crypto market (excluding the largest stablecoins) rose by around nine percent.
Due to the stronger price performance of altcoins compared to Bitcoin, Bitcoin dominance decreased by about two percent over the week. With Ether's price rising faster than the market average, the ETH/BTC ratio increased by nearly six percent during the week.
Among the tokens traded on the Kvarn X trading service, the biggest weekly gains were seen by the meme coin WIF and the native tokens of the Layer-1 protocols Sui and Aptos, SUI and APT. All three saw price increases of about 25 percent over the week.
From the above chart, we can see that WIF, one of the biggest gainers, only started its price rise on Monday, several days after the general market upswing. It will be interesting to see if its rise continues longer than the other top gainers, as the chart also suggests that at least SUI's upward movement seems to be coming to a temporary halt.
We also give a special mention this week to the PAXG token, which is a stablecoin pegged to the price of an ounce of gold. PAXG’s price rose again over the last week by about three percent.
The price of gold has risen by about 30 percent during 2024, reaching historical record levels.
PAXG allows investors to benefit from the rise in gold prices and diversify into gold without exiting the crypto sector. Its price behavior has the potential to diverge significantly from the general crypto market trend, which is why we will continue to monitor it in these weekly reviews.
Rate cut propels markets higher
The biggest single news of the past week was, of course, the U.S. Federal Reserve's announcement of a 0.50 percentage point cut in the interest rate. In advance, some analysts had speculated that such a large cut might trigger concerns about a rapidly deteriorating economic situation, negatively affecting asset prices. These speculations quickly proved unfounded, as stock market has risen sharply following the interest rate decision. Both the S&P 500 and NDX indices have surpassed their late August highs, indicating a new upward trend.
What about crypto?
The crypto market also saw a sharp rise immediately after the decision, with the price of Bitcoin, the largest cryptocurrency, quickly rising by over five percent. As Bitcoin's price rise stabilized, we saw a clear capital rotation into smaller crypto tokens, reflected in the steep rise of the OTHERS category, which represents smaller tokens.
The next big question is whether the crypto market can surpass the previous local high seen at the end of August. In terms of Bitcoin, this would mean breaking through the $65,100 level.
Prices have approached this level twice this week, on Monday and Wednesday. Both times, resistance has occurred near $65,000. As of writing (Thursday, September 26, 2024, 2:00 PM), a third attempt is currently underway.
The fact that this apparent resistance level has not been breached yet may raise doubts about whether it will be at all. It’s especially noteworthy that the crypto market's August peak has yet to be surpassed, even though the stock market easily climbed above its own peak.
For now, we refrain from drawing any conclusions. The next important macroeconomic data point will arrive this Friday, with the release of the PCE index, which reports on consumer price developments during August. While the focus of macroeconomic monitoring has shifted in recent months from inflation to employment, we still consider it possible that some caution may prevail in the market ahead of the key inflation metric's release. Therefore, we are not yet making strong interpretations about the crypto market's inability to break past its August high.
Update September 27, 2024:
Bitcoin's price broke through the local high from August, peaking at around $65,800 on Thursday.
Smaller tokens strengthening?
In previous Kvarn Pulse newsletters, we have presented the hypothesis that the nearly three-year decline of smaller crypto tokens against Bitcoin may be coming to an end.
We have hypothesized that the combined market value of smaller tokens (outside the top 10), represented by the OTHERS, may find a turning point relative to Bitcoin around a ratio of 0.16, where it also turned upward in the summer of 2023.
Our hypothesis has been supported by the fact that this ratio has bounced upward from the 0.16 level several times during the summertime.
In recent days, our hypothesis has gained further support as the OTHERS/BTC ratio made its first "higher high" in over a year. Interestingly, this ratio has already surpassed its August peak, even though the price of Bitcoin and the total market value of the crypto market have not yet done so. This could be one of the first signs that the beginning of rate cuts has somewhat shifted crypto investors' risk appetite, leading to a greater allocation toward smaller crypto tokens within the overall market cap.
Monitoring the relative valuations within the crypto market and analyzing even small turns in them may seem confusing to newer crypto investors, and the usefulness of such analysis may seem unclear. Why do we do this?
We consider tracking the OTHERS/BTC ratio very useful, as it provides valuable insight into how a crypto investor should approach altcoins. As long as the OTHERS/BTC ratio remains in a downtrend, smaller crypto tokens collectively weaken against Bitcoin. In this environment, the best risk/reward ratio in the crypto sector is typically found in larger tokens, particularly Bitcoin.
In these conditions, it's best to invest in altcoins very selectively, with high standards for selection criteria. Even after finding a potential good theme or narrative, it's essential to be aware that the tailwinds may end quickly, especially if the overall market direction reverses. Therefore, it’s wise to be ready to quickly exit altcoin positions if necessary.
When the OTHERS/BTC ratio turns upward, smaller tokens collectively start to outperform Bitcoin. At this point, the expected return on investing in altcoins improves significantly, as they benefit greatly from internal market momentum.
In our experience, investing in altcoins at the wrong time, for the wrong reasons, or with the wrong strategy has been the the most common stumbling block for many of those who have failed in crypto investing. In a Bitcoin-driven market, investing in altcoins takes a real skill, while in an altcoin-driven market, success comes much more easily.
It is therefore highly beneficial to understand what market conditions exist in terms of Bitcoin vs. altcoins and to adjust one’s investment strategy accordingly. Right now, there are signs that after nearly three years of Bitcoin dominance, the market may be turning back to altcoin dominance.
We will continue to monitor the development of the Bitcoin and altcoin relationship and keep you updated. At the moment, our hypothesis is that we have indeed shifted from a Bitcoin-driven market to an altcoin-driven one.
We are prepared to question our assumption if the next local bottom of the OTHERS/BTC ratio falls below the trendline drawn from the previous low (around 0.162). Until then, we operate under the assumption that, while the beginning of interest rate cuts has not yet brought an unambiguous turnaround in crypto prices, it may have already triggered a shift in the internal dynamics of the crypto market, leading to the relative strengthening of smaller tokens. Combined with a continued uptrend in dollar prices, this would create the conditions for a solid "alt-season," which many crypto investors have been eagerly awaiting.
We will revisit this topic in future Pulse newsletters, so stay tuned!
The material contained in the Kvarn Pulse is produced solely for the purpose of marketing communication. Any information conveyed through Kvarn Pulse should not be construed as an offer or an invitation to make any purchase or sale decisions, or as an encouragement to make investment decisions about any investment object. Copying or borrowing the content of the newsletter without Kvarn's express permission is prohibited. The information presented in the newsletter pertains to the situation prevailing at the time of writing, and the information may or may not have changed. Kvarn Capital Oy does not guarantee the accuracy or completeness of the information contained in the newsletter or referred to in the newsletter.
