Bitcoin and Ether, the two largest cryptocurrencies by market capitalization, have decoupled from traditional assets such as stocks, indicating that they will trade on their own merits. This development comes after a 14-month monetary tightening cycle that included 10 consecutive interest rate increases by the U.S. Federal Reserve took the federal funds rate to 5.25%, a level considered its probable stopping point.
While some market observers expect interest rates to increase another 25-50 basis points in the future, the Federal Open Market Committee's (FOMC) "Dot-Plot" implies that 5.25% is appropriate. The question for crypto markets is, "What's next?"
One factor to consider is that volumes for BTC and ETH have been declining and trail their 20-day moving averages. The reduced activity implies that investors are staying on the sidelines to a certain extent. As such, singular economic data points are having a muted impact on digital assets. Reduced activity also implies that BTC and ETH may trade within a range, absent asset-specific catalyst. This scenario won't provide a lot of immediate alpha, but also not a lot of downside misery.
Second, bitcoin and ether have largely decoupled from traditional assets. While bitcoin started 2023 with a daily correlation coefficient near 0.90 with the S&P 500, Nasdaq, and Dow Jones Industrial Average (DJIA), those have all since declined to close to zero.
The lack of correlation between BTC and traditional assets implies that investors are viewing the impact of monetary policy differently for digital assets than for stocks, at least for the moment. BTC's correlation with copper, the U.S. dollar, and gold has declined as well.
It's not abundantly evident what would cause such widespread decoupling or how long it will remain. The re-emergence of BTC as an alternative to fiat currency debasement and ETH's continued contracting supply are factors that may explain their separation from traditional assets.
Third, perpetual funding rates for BTC and ETH remain positive, an indication of bullishness. With the exception of a sharp decline on the day of Silicon Valley Bank's collapse, funding rates have been positive for the better part of 2023 for both cryptocurrencies.
Finally, "whales" are accumulating both bitcoin and ether. Their paths are different, but the supply held by addresses with more than 100,000 BTC and 100,000 ETH are moving higher. An interpretation of this trend is that entities with the most capital to deploy in crypto are allocating to both assets.
The trajectory for ETH appears to be a measured one, with a decline that began in September seemingly bottoming out on April 20. Bitcoin whales' movements have been more dramatic, with sharp moves higher followed by declines.
All told, digital assets appear to have branched out on their own. While today's economic news will have some impact on prices, the extent to which it does will likely differ from traditional financial assets.
It is worth noting that the decoupling of BTC and ETH from traditional assets does not necessarily mean that they are immune to the effects of broader market trends. The crypto market remains a relatively nascent space, and it is possible that volatility could return if there are significant global macroeconomic shifts.
However, the current lack of correlation between digital assets and traditional assets is a promising development for the crypto market. It suggests that investors are starting to view cryptocurrencies as a distinct asset class with its own unique investment merits.
One possible implication of this development is that traditional investors may begin to allocate a portion of their portfolio to digital assets as a way of diversifying their holdings. If this trend continues, it could lead to increased demand for BTC and ETH, potentially driving prices higher.
Another possible implication is that the decoupling of BTC and ETH from traditional assets could lead to a shift in investor sentiment towards cryptocurrencies. As investors become increasingly aware of the lack of correlation between digital assets and traditional assets, they may see cryptocurrencies as a way to diversify their portfolio and hedge against potential market downturns.
Furthermore, the recent decline in volumes for BTC and ETH may be indicative of a broader shift in the cryptocurrency market towards a more mature and stable phase. As the market becomes less volatile and more predictable, it may attract a broader range of investors who are looking for long-term investment opportunities.
However, there are also some potential risks associated with the decoupling of BTC and ETH from traditional assets. One risk is that cryptocurrencies may become disconnected from the broader economy, making it more difficult to assess their true value and potential impact on the market. Another risk is that regulatory authorities may become more wary of cryptocurrencies if they see them as a potential threat to financial stability.
Overall, the decoupling of BTC and ETH from traditional assets is an important development for the cryptocurrency market. While it remains to be seen how long this trend will continue, it is clear that digital assets are beginning to establish their own unique characteristics and value proposition. As more investors become aware of this, it is likely that cryptocurrencies will continue to attract attention as a potentially lucrative and innovative investment opportunity.
