Crypto Mini-Crash Squashes Myths of Altcoins Decoupling from BTC
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Crypto Mini-Crash Squashes Myths of Altcoins Decoupling from BTC

The recent crypto crash reveals two stories of correlation—between Bitcoin and altcoins, and between crypto and stocks.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

In the last five days, Bitcoin has dropped by approximately 16%. As the biggest hit since July, where does that leave altcoins that were supposedly on a decoupling trajectory a few weeks ago?

Ethereum Favored Over Bitcoin by Analysts

Last November, JPMorgan analysts favored Ethereum over Bitcoin. The case they laid out was simple. Ethereum (ETH) is an infrastructure asset while Bitcoin (BTC) is a store of value or an anti-inflation asset. In other words, Ethereum’s smart contracts powering thousands of dApps, from lending and gaming to NFTs and stablecoins, extend beyond Bitcoin’s narrow utility.

Moreover, the Federal Reserve’s policies can affect Bitcoin’s appeal even in that narrow range. By announcing the rise in interest rates, i.e., tapering, the Fed has notified institutional investors that cheap borrowing will come to a close. In turn, those spooked investors have started to sell their risky assets.

Although it is dubious if BTC can be described as a “risky asset”, it can definitely be described as speculative and volatile as it is vulnerable to wider market sentiment.

And one of the factors contributing to that sentiment is the recently issued paper on central bank digital currency (CBDC). Although a long way off, and a different asset class than BTC, it too brings uncertainty into the market.

Therefore, circling back to JPMorgan’ report from last November:

“The rise in bond yields and the eventual normalization of monetary policy is putting downward pressure on bitcoin as a form of digital gold, the same way higher real yields have been putting downward pressure on traditional gold,”

This leaves us with the following crypto state of affairs:

  • The Fed’s tapering program, aimed at normalizing monetary policy and stabilizing inflation, erodes Bitcoin’s appeal as a hedge against inflation.
  • Ethereum, not considered as digital gold, should be outperforming Bitcoin because the Fed’s policy doesn’t affect it. After all, even if the Fed does end up raising interest rates up to 1%, this is still 5 – 20x lower than on most DeFi protocols for lending and borrowing.

Yet, we have seen the opposite of what one would expect.

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Altcoins Outpace Bitcoin in Falling Down

It seems that good crypto news has little to no power in countering the Fed’s moves. According to The Financial Times sources, Meta’s integration of NFTs into Facebook and Instagram is incoming. This is a bigger deal than even PayPal announcing Bitcoin integration in October 2020. Meta effectively covers half the human population, while Instagram has around 1.3 billion users.

If a fraction of those users ends up in the crypto space, which is closely tied to NFT marketplaces, one should expect a huge influx of money. And the greater the influx, the greater the surge in the value of assets like Bitcoin. Even the news itself could spur BTC buy wall, as investors anticipate the next big adoption wave.

In the meantime, the crypto space is in bearish momentum. In the last three days, Bitcoin fell down by 15%. ETH, the second-largest cryptocurrency that is supposed to be on its way to decouple, drop even more than BTC, at 23%. The same goes for other infrastructural coins: Cardano (ADA), Terra (LUNA), Solana (SOL), and Binance Coin (BNB).

BTC vs. infrastructure coins. Image courtesy of TradingView.

As you can see, while Bitcoin tumbled, the top infrastructural coins tumbled even more. Only Terra (LUNA) remained closer to Bitcoin’s drop, at 18%. Moreover, Pearson’s correlation between Bitcoin and Ethereum grew tighter over time.

Pearson’s correlation between 0.5 – 1.0 is considered large. BTC-ETH correlation is above 0.8. Image courtesy of CoinMetrics.

What does this tell us?

First of all, while institutional investors have been a boon to Bitcoin’s price rise, they have also corporatized the crypto space. Meaning, the Fed-induced equity market slump affects cryptos even more. Like dominos, this downward force then transfers to Bitcoin, and from Bitcoin to altcoins. A tighter correlation to the S&P 500 is manifested by both trading volume and trading hours.

From this, we can conclude that the crypto market is growing more in sync with the macroeconomic conditions which affect the stock market. Furthermore, venture capital (VC) investments in crypto projects soared by 445% in 2021, while declining in Bitcoin-based products by 7%. Yet, this is still far from sufficient to fill the gap in Bitcoin’s market capitalization.

Bitcoin market cap dominance over one year. Image courtesy of TradingView.

While Bitcoin market cap dominance did decline from January to today by 24%, the altcoin market grew more diversified, especially among infrastructural coins competing for Ethereum’s market share. Case in point, Fantom (FTM) jumped by over 100% last month. Consequently, one could come to the conclusion from the data that altcoins decoupling from Bitcoin is most likely not in the cards.

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Do you think the Fed will hold true to its word this time around and proceed with interest rate hikes? Let us know in the comments below.

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