The recent Federal Reserve decision to lower interest rates has sent shockwaves throughout the cryptocurrency market, with altcoins emerging as the surprise winners. While bitcoin may have outperformed stocks in the aftermath of the announcement, the true stars of the show are the alternative cryptocurrencies.
Altcoin Index Surges 5.68%
Total3, an index that tracks the market capitalization of the top 125 cryptocurrencies, excluding bitcoin and ether (ETH), has seen a significant surge since the central bank’s announcement to slash the Federal Funds rate by 50 basis points. According to data on TradingView, Total3 is trading 5.68% higher compared to a mere 4.4% increase in bitcoin’s market capitalization.
Why Altcoins are Outperforming Bitcoin
So, what’s behind this remarkable performance? Experts attribute the divergence to several factors:
Higher Beta and Volatility
Altcoins tend to exhibit higher beta than their larger counterparts, making them a leveraged play on the broader crypto market. This means that when risk assets perform well, altcoins are likely to outperform, much like tech stocks do during periods of green shoots.
"Altcoins are at the fringes of the liquidity spectrum," said Bohan Jiang, Head of OTC options trading at Abra. "They will always be convex in performance when risk assets perform well and liquidity is abundant."
Low Liquidity and Short Positioning
The relatively low liquidity levels of altcoins mean they tend to move with greater volatility. This can lead to outsized moves both ways, particularly when short positions are building up over an extended period. The recent period of overselling has added velocity to the bounce-back of altcoins.
"Liquidity in alts is substantially poorer, causing outsized moves both ways," said Bob Wallden, head of trading at investment firm Abra. "Extended short positioning building up over the past few months can therefore cause short-squeeze-like outperformance higher."
The Role of Liquidity and Positioning
Altcoins perform as a function of liquidity and positioning. When liquidity is abundant, altcoins tend to move with greater volatility. The recent Federal Reserve decision has created an environment where risk assets are performing well, leading to increased liquidity in the market.
The Impact on Bitcoin
While bitcoin may have outperformed stocks in the aftermath of the FOMC announcement, it’s worth noting that its price movement is still significantly influenced by the broader crypto market. The recent surge above $64,000 and subsequent bounce back to $62,898 demonstrate the fluidity of cryptocurrency prices.
Conclusion
The Federal Reserve’s decision to lower interest rates has sent a clear message: risk assets are performing well, and liquidity is abundant. While bitcoin may have outperformed stocks in the short term, altcoins have emerged as the true winners in the crypto universe. With their higher beta, low liquidity levels, and outsized moves, altcoins offer a unique opportunity for investors looking to capitalize on the growing demand for alternative cryptocurrencies.
References
- TradingView
- Abra
