Bitfinex Alpha | BTC Tied to Equities but Alts Outperform

Last week BTC opened its account in September with a 10.7 percent drop in the first week, continuing the downtrend we have seen since late August. This decline, however, also pushed the price below the crucial low of $56,711 that was similarly seen on May 1st, a level that has previously triggered swift recoveries. The sell-off has resulted, not surprisingly, in a reduction of leveraged positions, indicating a market potentially nearing a local bottom. However, we believe US equity markets, particularly the S&P 500 – which last week saw its worst weekly performance since March 2023 – is critical to Bitcoin’s short-term trajectory. Correlations between Bitcoin prices and traditional financial markets persist, with significant spot ETF outflows in the past week suggesting that traditional finance investors are de-risking from cryptocurrencies. Notably, since August 27th, there have been $706.1 million in net outflows from Bitcoin ETFs, and a downtrend in aggregated spot Cumulative Volume Delta, indicating aggressive spot selling.

In contrast, altcoin markets have shown resilience. As the sell-off took hold last week Bitcoin dominance, which measures the market capitalisation of BTC against the rest of the crypto market decreased by 1.3 percent. In comparison, the market cap of all other crypto assets, (excluding the top 10) increased by 4.4 percent. Dare we say it, but the shift hints at a potential regime change where investors are exploring value in altcoins, diverging from the typical pattern of flocking to Bitcoin during downturns. 

Altcoin open interest, however, has also dropped by 55 percent from its all-time high, indicating speculative apathy and potential exhaustion among sellers. The ETH/BTC ratio, as a proxy for the altcoin market, remains under its 365-day Simple Moving Average, reflecting the broader underperformance of ETH since the  Merge. 

However, if Bitcoin dominance has indeed reached a local top, we may see a period of altcoin outperformance in the coming months, potentially setting the stage for a bullish Q4 should macroeconomic pressures ease. 

The main catalyst for the sell off last week was arguably the US labour market report for August displaying only modest growth. However, we see this as offering the Federal Reserve some reassurance as they prepare for a shift towards lowering interest rates. Employment figures rose less than anticipated, but the unemployment rate dipped to 4.2 percent from 4.3 percent in July.

In the manufacturing sector, evidence of continued contraction for the fifth consecutive month emerged. Driven by weak demand, this is further evidence to support a lowering of rates. Companies are cutting back on production to protect profit margins, mirroring broader slowdowns in economic activity.

The construction sector, too, is showing signs of strain. The US Commerce Department’s Census Bureau reported a 0.3 percent decline in construction spending in July, following no change in June. This decline was worse than expected, reflecting the broader slowdown in the housing market as reduced affordability and the fading of the pandemic-era housing boom impacts sales. Houses are staying on the market longer, and builders are exercising caution in starting new projects due to increased inventory and weaker demand. Overall, while certain sectors are seeing slight improvements, others are grappling with reduced activity.

In crypto news last week, Japan’s three megabanks—MUFG, SMBC, and Mizuho—are launching “Project Pax,” a pilot program using blockchain-based stablecoins to streamline cross-border settlements, and are aiming for commercial rollout by 2025. The project will integrate SWIFT’s API framework for compliance and efficiency. 

In the meantime, the Federal Reserve has issued a cease-and-desist order on United Texas Bank due to shortcomings it has found in its risk management and anti-money laundering practices regarding its crypto clients. It has ordered the bank to improve its oversight and customer due diligence procedures.

Have a great trading week!

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