All-Time Highs For Gold, S&P500; Crypto Stands Alone In The Red – What’s The Root Cause?

Crypto markets have recently faced renewed challenges, despite a brief resurgence following the US Federal Reserve’s (Fed) rate cut that initially propelled Bitcoin (BTC) back toward the $120,000 mark. 

This week, however, Bitcoin has dropped to the lower end of its established consolidation range, fluctuating between $110,000 and $115,000. Analysts from The Bull Theory have pinpointed several factors contributing to this downturn.

One of the primary reasons for the current situation is the ongoing capital flow favoring traditional assets. In the wake of rate cuts, institutional investors tend to channel their funds into stocks and gold first, as these are considered high-liquidity assets with a proven track record. 

In contrast, cryptocurrencies, particularly altcoins, often find themselves at the end of the liquidity pipeline. They typically see price increases only when risk appetite broadens significantly among investors.

Additionally, liquidity remains tight in the crypto space, despite the Fed’s recent actions. While the central bank cut rates in September, other variables are restricting the flow of capital into cryptocurrencies. 

Quantitative tightening (QT) is still being implemented, with the Fed actively reducing its balance sheet. Moreover, the US Treasury is absorbing liquidity through the replenishment of the Treasury General Account (TGA), and money market funds are currently holding over $7.7 trillion in cash that remains largely idle. 

This lack of liquidity means that any spillover effect into the crypto market will be limited, resulting in a slower rotation of capital into digital assets.

The macroeconomic patterns observed in September 2024 are also reemerging. Last year, following a rate cut, Bitcoin surged past $60,000, while Ethereum (ETH) and other altcoins enjoyed significant gains. However, this was followed by a sharp decline, with Bitcoin dropping 11% and Ethereum experiencing an even steeper fall. 

In a similar vein, this September has seen Bitcoin hover around $112,000 after briefly touching $118,000, while Ethereum has slipped from $4,600 to approximately $4.1,00. 

This cyclical pattern suggests that crypto may be primed for a rebound, but only after a period of consolidation and confirmation. Moreover, the impending expiry of options contracts for Bitcoin and Ethereum is adding another layer of volatility to the market. 

Another factor impacting the market is the supply and velocity of stablecoins. While the total supply of stablecoins has surged from $204 billion in January to $308 billion in September—an all-time high—the velocity of these assets is not keeping pace. 

The analysts have identified that much of this capital remains inactive, either sitting idle, bridged, or utilized off-exchange. Until stablecoin velocity increases, the price impact on cryptocurrencies is likely to remain subdued.

Looking ahead, historical trends suggest that although crypto may be lagging in the short term, they often follow traditional assets with significant gains once the market stabilizes. 

In the aftermath of all-time highs in equity markets, Bitcoin has previously averaged a 12% increase within 30 days and a remarkable 35% over 90 days. Notably, following the Nasdaq’s all-time highs, Bitcoin surged by an impressive 46% in the same 90-day timeframe.

For crypto markets to regain their momentum, active movement of stablecoins is essential, along with a cooling off of derivatives trading and substantial purchases from institutional investors and exchange-traded funds (ETFs).

Featured image from DALL-E, chart from TradingView.com