Author: Jeff Dorman, Chief Investment Officer of Arca; Translated by: 0xjs@Golden Finance
FOMC rebound
In late August, we discussed the signs of recovery we were seeing in the markets and how crypto was inevitably going to catch up to the ongoing rally in gold, U.S. Treasuries, and global stocks. Yet, cryptocurrencies plunged 20% the following week. Many, including ourselves, were spooked by the price action in late August/early September. But the FOMC came to the rescue. While the world debated whether it would be 25bps or 50bps, in the end it didn’t matter. Either way, the play was a long one. The rate cuts are finally here, and Powell was adamant in his press conference that the Fed wants to be ahead of the curve, not behind it.
Treasury yields have been anticipating this rate cut for months. The 2-year Treasury yield has fallen more than 150 basis points since May.
Source: TradingView
While Treasuries, gold, and stocks simply need confirmation of what they already know, cryptocurrencies need a real catalyst. While this isn’t the most exciting reason for digital assets to rise, it is the spark that the market needs.
But what’s interesting is that in a year led by Bitcoin, Solana, and a handful of memecoins and newly minted tokens, the market took the Fed’s cues and bought up beaten-down “altcoins.” Now, I hate the term “altcoin” because it doesn’t adequately differentiate between sectors, themes, and individual coins. But sadly, this past week it may have accurately described last week’s rally. There really is no theme, sector, or reason for the massive surge in many of the lesser-known coins. If it had been beaten down, it might have been up last week.
Given the many false alarms we’ve seen this year, it’s natural to question whether this rally can last. So, let’s look at some factors that could help determine the answer:
Macro – Extremely Bullish
The correlation between digital assets and stocks is at its highest level in two years, so there’s no doubt that macroeconomics is driving this right now.
Source: FalconX
At present, the positive macro factors are quite obvious.
After a few spikes, the VIX fell back to around 15%
Stocks and gold hit record highs
Treasury yields are falling again, with the 10-year yield now comfortably below 4%
Dollar continues to fall
Corporate credit spreads approach tight levels again
Geopolitical risks are relatively small
The Federal Reserve has left markets in no doubt that it will slash interest rates to combat the recession.
There is no doubt that all of these factors are very bullish. Obviously, the next few quarters will tell us if the Fed does indeed achieve a soft landing, but for now, the picture is fairly clear, at least until the election. Of all of these factors, I think the high crypto/stock correlation is probably the least bullish because it means that the digital asset industry doesn’t have a lot of catalysts for crypto right now.
Cryptocurrencies: Slightly Bearish
While the macroeconomics paints a bullish picture, factors specific to cryptocurrencies make it hard to get excited. On the positive side:
ETF inflows have been mixed. While inflows have been positive recently, they have their ups and downs and cannot really be relied upon.
Source: Coinshares
The oversupply caused by the bankruptcies of cryptocurrency companies such as Mt. Gox and Celsius, as well as selling pressure from the U.S. and German governments, has largely dissipated. The lack of sustained selling pressure can be seen as a modest positive.
There has been an increase in dispersion. We are starting to see a small “alt rally” led by a seemingly random collection of tokens. For example, in DeFi, Aave (AAVE) is now +37% MTD, but other DeFi tokens are not really following suit. Bittensor (TAO) leads all AI tokens and is now +97% MTD. Sui (SUI) has become the popular 0th, 1st, or 2nd layer VC token and is now +106% MTD. Immutable X (IMX) is actually the only gaming token that is up, +37% MTD. Aerodrome Finance (AERO) is +65% MTD as it is the only way to get access to the rapid growth in Base activity. Drift Protocol (DRIFT) is +58% MTD, partly due to Multicoin announcing an investment and partly because there is no way to invest in Polymarket and Drift is the next best thing in prediction markets. The fact that there is some real separation between tokens is certainly a modest positive.
But the positives for cryptocurrencies end there. The biggest problem with this rally is that there has been no real news other than the Fed.
The Token 2049 conference and the Solana Breakpoint conference in Singapore failed to announce any major initiatives. Given the large attendance, the content of the events was almost lackluster. Arca’s site lead Katie Talati barely contacted the parent company because there was no news worth reporting.
Exchange volume, while off the lows, is still nowhere near the levels we typically see in longer, more significant rallies.
Source: Arca internal calculations
And most of the buying interest is based on futures rather than spot. This means that there is actually no new money entering the asset class. Instead, most of the buying pressure is speculation using leverage. Futures open interest and financing rates are both rising.
Source: VeloData
While the market can certainly move significantly higher simply due to underperformance relative to other asset classes and a bullish macro backdrop, we need to see some real money entering the system coupled with some crypto-specific positive events. The November election could be that spark, as many good crypto ideas are currently unable to come to fruition due to regulatory pressure.
