How to play the altcoin rally and bitcoin waiting game?
The US Fed delivered another 25bps rate cut on Wednesday, in-line with Street expectations. The knee-jerk reactions from the equity markets and the FX markets were muted, as the cut were pretty much already priced in. While the outlook of the future rate policy was mixed for now, how could the potential changes in macro policy setting alter capital flows and the possible impact on the cryptocurrency markets? Meanwhile, the prices of bitcoin dipped to below the 10,000 psychological levels on Thursday trading, at the same time, the discussions of the beginning of the “altcoin season” has been heating up, how traders and investors set the priority between bitcoin and altcoins?
Party’s Over…For Now
The US Federal Reserve has made the biggest news headline this week in the markets, as the policymakers slashed the interest rates by a quarter of a percentage point for the second time this year. While this was a widely expected move, markets were being skeptical about the Fed’s next move. Chairman Jerome Powell said “moderate” policy moves should be able to maintain the US expansion and stressed that the cut is a step to help the US economy strong. However, Powell also said, “weakness in global growth and trade policy have weighed on the economy.” The yes-and-no answer leaves the markets not much of a clue for the FOMC’s next move.
Figure 1: FOMC Participants’ Assessments of Appropriate Monetary Policy
In a note to clients, Calvin Tse, Head of North American G10 FX Strategy at Citigroup, said that “With the median dot in 2020 showing no change and hikes for 2021 and 2022, the Fed has softly signaled that this may be the end of their easing, and remained bullish on the dollar.”
Figure 2: Citi Economic Surprise Index (US)
Source: Citi Economics
Implications on Crypto
Changes in interest rates may not bring a direct impact to the cryptocurrency markets, but it certainly will alter the global capital flows, and this shift could potentially affect the crypto market in a macro way.
If we build on a dollar bull case, a strong dollar may not be the best for bitcoin. The dollar index generally had a negative correlation with bitcoin prices (figure 3), which means the DXY goes up, the prices of bitcoin goes down. This negative correlation currently at the highest level in nearly six years.
Figure 3: BTC-DXY 90-Day Correlation Since Late 2012
Bitcoin or Altcoin?
While the prices of bitcoin may be affected by the global capital flows over the long term, many investors have been asking whether if they should increase their altcoin exposure. The fact that altcoin has been gaining more attention in recent weeks, as the prices of major altcoins have surged dramatically, comments about the beginning of a new “altcoin season” have emerged throughout the internet.
We believe bitcoin should remain as the primary focus despite the continuation of the consolidation. When you look at the weekly chart of some of the major altcoins (figure 3), it’s not hard to discover that they were still in a downtrend and far away from a real trend reversal.
Figure 4: ETH/LTC/EOS USDT Weekly Chart
Source: OKEx; Tradingview
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