Crypto markets are currently encountering renewed obstacles, following a short-lived rebound after the US Federal Reserve’s (Fed) rate cut which had previously nudged Bitcoin (BTC) closer to the $120,000 threshold.
This week, Bitcoin has descended toward the lower boundary of its established consolidation range, oscillating between $110,000 and $115,000. Analysts from The Bull Theory have identified several elements that are contributing to this decline.
The Impact of Fed Policies and QT on Crypto
A primary factor behind the current predicament is the ongoing capital migration towards traditional assets. Following rate cuts, institutional investors typically prefer transferring their capital into stocks and gold, as these are deemed high-liquidity assets with a reliable history.
On the contrary, cryptocurrencies, especially altcoins, often lag at the end of the liquidity distribution. They generally experience price hikes only when there is a significant increase in risk appetite among investors.
Related Reading
Furthermore, liquidity within the crypto sector remains constrained, despite the Fed’s recent maneuvers. Even with the central bank’s rate cuts in September, other factors are hindering the inflow of capital into cryptocurrencies.
Quantitative tightening (QT) continues to be enforced, as the Fed actively trims its balance sheet. Additionally, the US Treasury is absorbing liquidity through the replenishment of the Treasury General Account (TGA), and money market funds currently hold over $7.7 trillion in largely inactive cash.
This liquidity shortage implies that any potential spillover into the crypto market will be limited, resulting in a slower capital rotation toward digital assets.
Cyclical Trends Indicate Possible Recovery
The macroeconomic trends observed in September 2024 are also resurfacing. Last year, after a rate cut, Bitcoin surged beyond $60,000, while Ethereum (ETH) and other altcoins saw substantial gains. However, this was followed by a sharp downturn, with Bitcoin dropping 11% and Ethereum experiencing an even larger decline.
Similarly, this September, Bitcoin has fluctuated around $112,000 after briefly reaching $118,000, while Ethereum has decreased from $4,600 to roughly $4,100.
This cyclical behavior suggests that the crypto market might be poised for a rebound, but only after a period of consolidation and confirmation. Additionally, the looming expiry of options contracts for Bitcoin and Ethereum is introducing another layer of volatility to the marketplace.
Stablecoin Dynamics and Institutional Investments
Another element affecting the market is the supply and turnover of stablecoins. While the overall supply of stablecoins has increased from $204 billion in January to $308 billion in September—setting a new record—the velocity of these assets is not progressing at the same rate.
Analysts have noted that a significant portion of this capital remains inactive, either sitting idle, bridged, or used off-exchange. Until the velocity of stablecoins rises, their impact on cryptocurrency prices is likely to stay subdued.
Related Reading
Looking forward, historical trends indicate that even if crypto appears to be lagging in the short term, they often follow traditional assets with notable gains once the market stabilizes.
Historically, after all-time highs in equity markets, Bitcoin has averaged a 12% increase within 30 days and an impressive 35% over 90 days. Notably, following the Nasdaq’s all-time highs, Bitcoin surged by an extraordinary 46% in the same 90-day period.
For crypto markets to regain their momentum, it is essential for stablecoins to be actively moved, alongside a cooling of derivatives trading and significant acquisitions from institutional investors and exchange-traded funds (ETFs).
Featured image from DALL-E, chart from TradingView.com
