CPI and Fed swing markets

Week by numbers

The last week has gone in a clear downward direction on the crypto market. The price of the largest cryptocurrency bitcoin fell by about five percent and the price of the second largest cryptocurrency ether (ETH) by about nine percent. The total value of the crypto market outside of bitcoin and ether (TOTAL3) decreased by approximately nine percent, and the total value of the crypto market excluding ten largest tokens (OTHERS) decreased by approximately 12 percent.

As is typical for the down week, the prices of smaller tokens fell more on average than larger ones. As a

result, bitcoin dominance (BTC.D), which describes bitcoin’s share of the total value of cryptocurrencies, increased by approximately two percent, and Others dominance (OTHER.D), which describes the share of smaller tokens in the total value of the crypto market, decreased by approximately five percent.

ETH/BTC, which describes the relationship between the two largest cryptocurrencies, bitcoin and ether, fell by about four percent.

Among the tokens of the Kvarn X, the only token that ended up in green in the downward week was the Tron blockchain's TRX (+1%). Along with Bitcoin, the smallest price declines were seen by Cardano's ADA token (-7%) and Stellar's XLM token (-7%). The biggest price drops were recorded by Gala Games' GALA (-26%), Fantom's FTM token (-20%) and Arweave's AR token (-19%).

CPI and Fed meeting swung the markets

Wednesday saw a particularly interesting day in macroeconomics. The Consumer Price Index, which indicates about the development of consumer prices in the United States during May, was published in the afternoon, and later in the evening, the US Federal Reserve's Open Market Committee (FOMC) gave the latest decision regarding the central bank's interest rate. From the perspective of the markets, thesee were two key data points for the same day, which was reflected in the clear nervousness of the market during Tuesday and bitcoin price falling by about five percent.

In the afternoon Finnish time, the Consumer Price Index reported that consumer prices remained the same during May (+0.0%) and rose by 3.3% from a year ago. Both readings were a tenth of a percentage point lower than the consensus forecasts, and thus happy news for the market. The market's reaction was downright jubilant, and the price of the largest cryptocurrency, bitcoin, jumped almost immediately by three percent. In smaller cryptocurrencies, price increases could be as much as ten percent.

The drop in May's monthly inflation was excellent news also from the point of view of the longer-term inflation development. This monthly change was lowest since the summer of 2022.

The excellent news received in the afternoon carried markets in a good mood towards the US central bank's interest rate decision to be published in the evening. There was not much uncertainty about in the interest rate decision itself, because according to the CME FedWatch Tool, the market had already estimated in advance that the interest rate would remain unchanged with more than 99% probability. Attention was primarily focused on central bank director Jerome Powell's comments and so-called "dot plot" diagram depicting the expectations of key Fed officials.

After the good news earlier in the day, Powell’s comments poured a little cold water on market's highest expectations. The central bank stated that it expects only one cut in the interest rates during 2024. This is quite a step back in the expectations for rate cuts, because as recently as January 2024, many expected the central bank to lower the key interest rate 5-6 times during year 2024.

Naturally, the market did not receive these news with joy. The bounce of several percent of cryptocurrencies seen earlier in the day was wiped out in a couple of hours.

By midnight Finnish time, crypto market had therefore returned to the same level as it had started on Wednesday.

In summary of the exciting day, at least the following can be stated:

1. The crypto market lives and breathes at the same pace as the macroeconomics. Even if macroeconomics is not of particular interest, it is good for a crypto investor or trader to have some idea of what is happening in the macroeconomics, and when any significant new information is published.

Interpreting Wednesday's cryptocurrency price events without awareness of the day's program on the macroeconomic side would have been quite a difficult task.

2. Events that provide significant new information, such as CPI (or another key inflation indicator, PCE) releases or US Federal Reserve interest rate decisions, often bring short-term volatility to the market like seen on Wednesday. A risk-averse investor may consider reducing positions before these moments if they want to reduce their portfolio's exposure to this volatility.

3. On the other hand, for the short-term trader, this very volatility also offers plenty of potential. Price movements of a few percent for bitcoin and about ten percent for smaller tokens offer significant opportunities for intraday trading. Of course, this requires monitoring the market before the event, and the possibility to follow the event and the market reactions caused by it in real time.

Crypto market focusing on the biggest tokens

We return now to the bitcoin dominance, Others dominance and ETH/BTC ratio presented earlier.

In a slightly longer term, the development of these indicators has been very similar to this week. Throughout 2024, bitcoin dominance has been slowly creeping upwards, while the ETH/BTC ratio, despite momentary bounces, has been steadily moving downwards. The dominance of “Others”, which describes the share of smaller tokens in the entire crypto market, experienced a strong rise at the end of 2023, but during 2024 it has also been in a clear downward trend despite momentary increases.

Our view is that this development is typical of a bull market during quantitative tightening, where despite rising crypto prices, tokens with a higher market value do relatively better. In this respect, the bull market differs from, for example, the bull market that took place during the quantitative easing  of 2020-2021, where small alt-coins as a collective produced clearly better than the largest tokens.

The current situation can be compared to the bull market of early 2019. At that time, interest rates were also high for the time (although not as high as now), and the US central bank started lowering the key interest rate in the fall of 2019. In the bull market at the beginning of the year, the price of bitcoin rose sharply, almost quadrupling in half a year. At the same time, however, ether and smaller tokens clearly underperformed, which can be seen in the increase in bitcoin dominance and the significant decline in the ETH/BTC ratio and Others dominance.

The purpose of this anecdote is to remind those who are most fervently waiting for an "alt-season" that it is not guaranteed to happen at all in all bull markets. In the fall of 2019, after the US central bank started lowering the key interest rate, smaller tokens did start to strengthen against bitcoin. However, the bull market itself was already over by then, and bitcoin's dominance decreased as the dollar rate of bitcoin decreased at the same time.

Our basic assumption is that we would see the current concentration of the crypto market on larger tokens continue until the US central bank finally actually starts lowering the key interest rate. This does not mean that individual alt-coins cannot perform better than bitcoin, but it is necessary to pay special attention to their selection in these circumstances, because the conditions are not really supporting smaller tokens yet.

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