Crypto market moves downward

The last week has seen slightly downward movement in the crypto market. The price of the largest cryptocurrency bitcoin fell by approximately six percent, the second largest cryptocurrency ether by six percent, and the total value of the rest of the crypto market by approximately four percent.

Within the overall down market, the strongest gainers of Kvarn X's selection were Maker (MKR, +20%), Bitcoin Cash (+11%) and Litecoin (LTC, +5%). We will discuss Bitcoin Cash more below. On the other hand, the hardest price drops were seen from Sui (SUI, 20%), Aptos (APT, -19%) and Arweave (AR, -17%).

As a summary of the week, it can be stated that despite the strong days seen in between, the correction movement that started after bitcoin's new ATH in mid-March is not yet convincingly over. We consider it very possible that we could see the price moving around 60,000 dollars again.

It is worth noting that even after the correction movement and the sideways price movement, the bitcoin price is still quite high compared to some frequently used moving averages. For example, compared to the 20-week moving average, which often acts as a support level in bull markets, bitcoin price  is currently still around 30% higher, which can still be considered a fairly elevated level.

Therefore, it wouldn't be a particularly surprising scenario, even if the strong rally at the beginning of the year is would be digested for several more weeks. In a potentially prolonged consolidation phase, a crypto investor who is used to the parabolic rise of the last few months needs to above all to stay calm and patient. For a shorter-term trader, it may be best to focus on finding interesting developments in individual tokens, in absence of overall trending market.

BCH rockets before its halving

One striking exception in the generally downward trending crypto market has been the Bitcoin fork Bitcoin Cash, whose native token BCH has clearly risen in price in recent weeks.

The halving of the block rewards of the Bitcoin Cash protocol, which was born as a hard fork out of "block size wars" of 2015-2017, and whose block size is clearly larger than the original bitcoin, will take place this week on Thursday 4th April 2024. Due to the halving event and the general rise of the crypto market at the beginning of the year, the price of BCH has more than doubled in just over a month. At the same time, BCH has also strengthened against bitcoin by more than 50 percent.

As is often the case in the crypto market, it is also worth looking at the period preceding the strong price movement. The graph below illustrates how the dollar price of BCH has barely maintained its level from October to February, while the rest of the crypto market was moving sharply upwards in a strong bull market. While the dollar rate of BCH was standing still, it weakened against bitcoin by several tens of percents. After almost half a year of underperforming the market, the halving rally of the month should probably be seen primarily as a mean reversion.

Although it's usually not wise to bet against the prevailing trend, in this case we don't think it's likely that BCH's outperformance would continue well past the halving. According to our assessment, it is likely that at least the BCH/BTC ratio will decline towards the readings of the beginning of the year. The dollar-denominated price of BCH may of course continue to develop positively if Bitcoin starts to pull the entire market up again.

To be clear, Bitcoin Cash and its halving should not be confused with the actual Bitcoin halving, which will take place in a couple of weeks. Although both are about the halving of their protocol's block reward, these are events of a completely different size and signifigance.

For those interested in the birth of Bitcoin Cash and the Bitcoin "block size war" that preceded it, we warmly recommend Jonathan Bier's book The Blocksize War: The battle for control over Bitcoin's protocol rules (2021), which deals with this rather significant period in Bitcoin's history.

ETH/BTC on a knife-edge

The second largest cryptocurrency ether (ETH) has clearly weakened against the largest cryptocurrency bitcoin (BTC) in recent weeks. This has brought the ETH/BTC ratio b back to around 0.05. This level is very interesting, because in the last two years it has been the last support level from which the ratio has started to rise again. Below this level, no obvious support levels have been built, and if the ratio falls below 0.048, it is not clear how low it can go.

A scenario where the aforementioned support level of the ETH/BTC ratio would fail and the ratio would fall to, say, 0.04 or even 0.03 would create an interesting situation, especially for those who have focused their crypto allocation on bitcoin. From the point of view of one used to the ETH/BTC ratio of recent years, a situation where one bitcoin could to change to 25-35 ether, would seem quite attractive opportunity, if you believe in the future of ether at all.

It seems particularly attractive if you add in to the equation the assumption that the US central bank will actually start lowering the interest rates in the summer, and that this loosening of monetary policy would lead to relatively higher-risk investments (alt-coins) strengthening against lower-risk ones (bitcoin). In the ideal scenario, the ETH/BTC ratio during Q2-Q3/2024 would collapse to the level of 0.03-0.04, and then during Q4/2024-Q1/2025, after the interest rate reductions start, it would return to the level of 0.06-0.09 familiar from last years . If one wishes, one can add  into mix some speculation about the possible approval of ETH ETF license applications in 2025.

Of course, it is worth emphasizing that there are absolutely no guarantees that this movement will materialize. In the past two years, the ETH/BTC ratio has knocked the 0.05 level already three times without a breakdown. On the other hand, even if a significant dip in the ratio downwards was seen, there is no certainty if 0.06-0.09 levels will be seen again. Over the past year, Solana's credibility as a challenger to Ethereum has grown significantly, and it may be that the SOL token's growing share of the non-bitcoin crypto market grows specifically at the expense of ether. The third uncertainty is related to whether, when the US central bank's key interest rate reductions finally begin, they do so at so-called a "hard landing" or "no landing" situation. These can mean very different development directions for the riskiest investment targets (such as alt-coins) compared to less risky ones.

The markets expect a rate cut in the summer

One development that has happened at the same time as the cooling of the crypto market, and most probably also contributed to it, has been the market's interest rate cut expectations constantly moving later. At the beginning of February, the market considered it almost certain that the key interest rate would decrease in May at the latest, and a 0.50% rate cut was by then considered almost as probable as a 0.25% cut. Expectations of a 0.50% interest rate cut faded during February, and during the last March the market seems to have abandoned expectations of any interest rate cut in May.

At the moment, the market estimates about 60% probability for the first policy rate cut in June at the latest, and about 75% probability in July at the latest. These numbers have also been in a clear downward trend during February-March. The next data point that could swing interest rate expectations more strongly may be received next week, Wednesday, April 10, 2024, when the CPI index describing the development of consumer prices in the United States is published.

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