Crypto market moves downwards

During the last week, the crypto market has been in a strong downward direction. The price of the largest cryptocurrency bitcoin fell by approximately 12 percent, the second largest cryptocurrency ether by approximately 15 percent, and the total value of the rest of the crypto market also by 15 percent.

BTC, ETH and rest of the crypto market

Of the tokens in the Kvarn X token selection, Maker (MKR, -7%), Tron (TRX, -7%) and Quant (QNT, -13%) experienced the smallest price declines. On the other hand, the biggest price declines of the week were seen from Gala (GALA, -32%), Moonbeam (GLMR -32%) and EOS (EOS, -31%).

The smallest and biggest price declines of Kvarn X tokens.

The week was particularly marked by the sharp price declines of alt-coins. While the price of the largest cryptocurrency bitcoin went down "only" twelve percent, many alt-coins saw price drops of 30-50%. With bitcoin's smaller price drop than the rest of the market, bitcoin dominance, which describes bitcoin's share of the value of the entire crypto market, rose by more than a percentage point to around 55.5 percent. As geopolitical tensions rose on Saturday night (more on that later), bitcoin dominance momentarily rose to as much as 57 percent, its highest reading in about three years.

Bitcoin dominance over the past week

The sharp price drops of smaller crypto tokens that are further along the risk curve and the clear increase in bitcoin dominance indicate a decrease in the markets’ risk appetite. The same phenomenon can be seen in the stock market, where the technology index Nasdaq, which has been on the rise for a long time, has fallen by around five percent in the last week.

Nasdaq index

Geopolitics rocked cryptocurrency prices

Particularly strong volatility in the crypto market was seen late Saturday night, as the news of Iran's drone and missile strike on Israel began to spread. Bitcoin's price fell by about eight percent in a couple of hours, and smaller crypto tokens saw drops of several tens of percent. The tense situation in the Middle East and its possible escalation form a clear factor of uncertainty for the time being, which may continue to be reflected in the market as a reduced willingness to take risks.

From a purely financial market point of view, Saturday night's market swing highlighted the special quality of the crypto market. With the stock market closed over the weekend, there were few open avenues in the crypto market through which investors could adjust their risk exposure in real time as a significant geopolitical event struck. This was reflected not only in the price drop of the riskiest alt-coins, but also in the sharp price spike of the gold backed stable coin Pax Gold (PAXG).

The total value of the crypto market and the exchange rate of PAXG stable coin

Bitcoin dominance on the rise

One of the defining features of the crypto market in recent weeks has been the further strengthening of bitcoin's dominance. This trend, which has been going on for a year and a half, has received a new boost after the market rise at the beginning of the year stopped about a month ago.

Bitcoin dominance uptrend 2022-2024

Intuitively it may be difficult to grasp the significance of a rise of a few percentage points in Bitcoin dominance. The point is illustrated if we look at the performance of selected major alt-coins against bitcoin.

It can be seen from the graph that several large alt-coins have weakened by several tens of percent against bitcoin in the last 1.5 years. In the case of XRP and DOT, the decline has been up to 65%. Of course, there are exceptions to the main direction of the trend, such as Solana (SOL), but on average alt-coins have clearly weakened against bitcoin.

How should a crypto investor take into account the rising trend of bitcoin dominance?

As long as the 1.5-year rise of bitcoin dominance continues, investors should be aware that a market situation like this does not favor alt-coins. It does not categorically mean that individual alt-coins or their sub-categories cannot offer excess returns compared to bitcoin. However, it does indicate that the general trend is currently not in favor of smaller tokens. In such a market situation, it is therefore necessary to pay special attention to the screening and selection of any alt-coins.

So when might bitcoin's dominance reverse, and the alt-coin market start to strengthen again relative to bitcoin? One possible date is considered to be the first rate cut by the US central bank. The hypothesis is that the first cut in rates would turn the market's willingness to take risks in an upward direction again, which could be seen as a relative strengthening of higher-risk alt-coins.

During the beginning of the year, expectations for the first key interest rate cut have been constantly pushed back, and at the moment the market is quite skeptical about the realization of the interest rate cut in July.

CME FedWatch / Probabilities for rates at the Fed meeting in July

If the rate cut is not done in July, the next possible date is September.
The market currently estimates a 71% probability of an interest rate cut by then.

However, it is also worth reminding that there are no guarantees of the effect of the policy interest rate decrease favoring alt-coins. Of great importance is the economic situation in which the first reduction in the key interest rate will eventually take place. September is still a long time away and a lot can happen in the economy, so the hypothesis of a reversal of bitcoin dominance should really be treated as just a hypothesis at this point.

Bitcoin halving this weekend

The biggest regular event in the cryptocurrency world, the halving of the block rewards of the bitcoin protocol, i.e. the so-called Bitcoin halving is happening this week. There is still some uncertainty regarding the exact time of the halving, but with a high probability it will be on Saturday morning Finnish time.

Bitcoin halving is programmed to happen every 210,000 bitcoin blocks, which in terms of time means a little less than four years. Previous halvings took place in 2012, 2016 and 2020, so the current halving is one of its kind. In this fourth halving, the amount of new bitcoins a miner receives as a reward for mining a new bitcoin block decreases from 6.25 to 3.125. Since mining fees are the only mechanism by which new bitcoins are issued, a halving of the block reward also means a halving of the annual issuance rate of bitcoin from the current approximately 1.7% to approximately 0.85%.

So far, all Bitcoin halvings have happened in the middle of bitcoin's strong bull markets. This temporal connection has led to various analyzes of the causal connection between the halving and the increase in the price of bitcoin.

Bitcoin rate and halving dates (weeks)

In its simplest form, the argument is that supply shrinking with the halving and demand remaining unchanged or increasing should logically lead to a price increase, and that the observed bull market is empirical proof that this is actually happening.

The challenge in evaluating this hypothesis is that it is also possible to explain the bitcoin bull market with factors completely independent of the halving. Attached is the development of the technology index Nasdaq added to the halving schedule as an example. From the graph, it is easy to see how the halvings have hit the middle of  strong uptrends not only of bitcoin, but also the of the Nasdaq.

Until bitcoin's price shows a more obvious deviation from the development of technology shares and other higher-risk assets, it is difficult to draw a credible conclusion about the central role of halving events in bitcoin's course development.

Whatever one thinks about the impact of the halving on the bitcoin exchange rate, the event has at least significant symbolic value for the cryptocurrency world. Bitcoin's programmatic and predetermined issuance represents many ideals of the crypto sector, such as predictability and transparency. In addition, it causes increasing coverage in the mainstream media as well, which tends to arouse interest in an audience unfamiliar with the topic.

This halving also illustrates the exceptional nature of the current market cycle. At the time of the previous halvings, the crypto market was only at the beginning of its current bull market, and the bitcoin price was still far from its previous market peak. This time we may have seen new ATH readings even before the halving, and at the time of the halving, the bitcoin price will probably be close to the peak readings of the previous market cycle. It will be interesting to observe what kind of market reactions the halving causes in this market situation different from previous times.

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