In the aftermath of the Federal Reserve's decision to lower interest rates, altcoins have demonstrated remarkable performance, outpacing Bitcoin. Since the announcement, cryptocurrencies, apart from Ethereum and Bitcoin, have surged by 5.7%, while Bitcoin has experienced a rise of 4.4%. This trend highlights a distinctive pattern that investors should keenly observe. Finance experts have pointed out that this divergence is not an unexpected phenomenon due to the nature of altcoins, which exhibit lower liquidity and a higher beta relative to Bitcoin.
Bob Wallden, who heads trading at investment firm Abra, shared insights indicating that altcoins represent a higher beta proposition than Bitcoin and Ethereum, essentially serving as leveraged plays on the broader cryptocurrency market. This behavior closely mirrors how technology stocks often outperform the S&P 500 during bullish phases in the market. Observations from Total3, an index that monitors the market capitalization of the top 125 cryptocurrencies excluding Bitcoin and Ethereum, reveal that it has registering a trading increase of 5.68% since the Fed's announcement of a 50-basis point cut in the Federal Funds rate.
Comparatively, Bitcoin’s market capitalization witnessed a modest increase of only 4.4%. The category encompassing all crypto assets other than Bitcoin and Ethereum may have gained from a recent trend of overselling. In this context, Wallden noted that the recovery in altcoins is gaining momentum as a result of this overselling, which, in turn, is propelling their rebound. Bohan Jiang, the Head of OTC options trading at Abra, elaborated on the dynamics influencing altcoin performance, emphasizing that their movement is heavily influenced by liquidity and positioning.
He pointed out that the liquidity levels among altcoins are relatively low, which results in pronounced volatility. Altcoins exist on the fringes of the liquidity spectrum, showcasing significant performance fluctuations when risk assets perform well and liquidity is sufficient, a situation portrayed in the current post-FOMC climate. Jiang further clarified that the performance of altcoins is deeply intertwined with liquidity and market positioning.
The relatively poor liquidity can lead to substantial price movements in both directions. An extended period of short positioning over the last few months could even lead to scenarios akin to short squeezes, resulting in pronounced outperformance. In the wake of the Federal Reserve’s policy shift, Bitcoin experienced a notable surge, crossing the $64,000 mark on Thursday, a price point last observed on August 26.
Subsequently, Bitcoin adjusted its position and is now trading around $62,898..