Total altcoin market capitalization (including Ethereum) stands at $1.02 trillion today.
The price of Bitcoin (BTC) needs a context to paint a meaningful picture. For instance, BTC is trading at $39,300 today. Last year, BTC traded at a similar price range in February. Yet, the market sentiment observed then and now are poles apart. Last year, BTC was the talk of the town for its eye-catching price rallies. While BTC is still making headlines, it is received with a hint of doubt and uncertainty by a majority today.
Given the recent capitulations, one can’t blame the market participants either for having a cautious outlook on the market. However, many investors are exposed to altcoins (crypto assets other than BTC) and it is worthwhile to understand the risks involved with such an exposure, especially at a time when BTC is in bearish territory.
In this article, we take a brief look at the current state of the altcoin market and risks associated with an exposure to altcoin.
Altcoins
The total market capitalization of the altcoin market (excluding that of BTC) stands at $1.02 trillion today. Ethereum is the largest of them all and has a market cap of $347 billion. The altcoin market has multiplied by 10 times since 2021, aided by the meteoric rise of BTC. While altcoins have come a long way in terms of utility and adoption, they have continued to take cues from BTC when it comes to price trends.
Predicting the price of a crypto asset is hard, given the multitude of factors involved. Therefore, the best strategy to navigate these highly volatile markets is to map out all possible scenarios and deal with it on a case-by-case basis. So, even if one is invested in altcoins, the first step is to examine what BTC is likely to do next.
Scenario 1
BTC has been closely intertwined with the Nasdaq, aka tech stocks, ever since it caught the attention of the world’s biggest venture funds, institutions, and nations like El Salvador. Tech stocks, in turn, depend on movement of the U.S. Dollar (DXY). Investors trust the U.S. Dollar during global uncertainty, making it the most risk-off asset of our times. Therefore, if the dollar is rallying, then the likelihood of tech stocks (along with BTC) appreciating is minimal. Shown below is the weekly trend of BTC in comparison with the DXY (orange line) that depicts the inverse correlation between them.
Source: TVC, TradingView
If this scenario of dollar uptrend continues to play out, BTC is more likely to establish a downtrend or at best remain range-bound which will result in a strong bearish outlook for altcoins. The usual argument put forth by altcoin holders is that since altcoins are already down by the tune of 70%, it wouldn’t possibly go lower. While one may wish it was true, altcoins can in fact retract far from the current levels. The thumb rule is: a small percentage dip in BTC means a large percentage dip for altcoins.
Scenario 2
If U.S. Dollar has a blow off top like it did back in 2020 as shown in the image below, then the crypto markets which are deemed as risky can expect flow of funds from sidelined capital and probably even trigger a fresh participation from retail investors.
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Source: TVC, Tradingview
On a macro level, crypto markets are in a tough spot. On one hand, the U.S. Federal Reserve has begun to apply brakes on its stimulus programs by proposing to increase interest rates while on the other, countries like India are forced to operate under unfavorable regulatory/taxation climate.
While investors may hope for the best case scenario to play out, it is important to understand that the market does not care about emotions. A completely new scenario can also emerge, negating the above described ones. Therefore, it is always wise to take in all the information available at the moment and have multiple strategies in place to navigate the markets because when push comes to shove, losses will accumulate.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.