Altcoins Outperform Amid Buoyant Crypto Market Sentiment

Crypto Market Overview

Cryptocurrency markets were buoyed on Tuesday and Wednesday, with the total crypto market capitalisation rising 2.4% to $1.93T over the last 24 hours, according to CoinMarketCap data.

The two largest cryptocurrencies by market cap, bitcoin and ethereum, were up a respective 2.5% and 2.2% in the last 24 hours, with the former hitting its highest level since 11 April above the $41,500 mark.

Conversely, ethereum has so far been unable to break above an important short-term level of support turned resistance in the form of last Mondays high around $3,150.

Meanwhile, in a sign of the crypto markets strong risk appetite on the day, many major altcoins saw substantial outperformance versus the likes of bitcoin and ethereum.

SOL and LUNA, the native tokens of the Solana and Terra blockchains, were last up over 6.0% in the last 24 hours, CoinMarketCap data showed.

SOL/USD was last trading just under $110 per token and eyeing a breakout towards its 21-Day Moving Average at $113.50, while LUNA/USD was last trading just above its 21DMA at $96.36 and eyeing a test of the $100 level.

Elsewhere, Dogecoin was up 3.8%, Polkadot was last up 6.0%, Polygon was last up 3.3% and Cronos was last up 3.2% in the last 24 hours.

Meanwhile, other major altcoins Cardano, Avalanche and Shiba Inu were all trading with slightly more modest gains in the last 24 hours of closer to 2.5%.

Other notable altcoin movers in the last 24 hours include ApeCoin, which soured 34% on anticipation that it would be the defacto payment mechanism in an upcoming land sale in the Otherside metaverse.

Favourable Macro Conditions

Recent gains in cryptocurrency markets come primarily as a function of recent upside in global equity markets, which has been led primarily by strength in large-cap US tech stocks. The Nasdaq 100 index gained over 2.0% on Tuesday to nearly break out to fresh two-week highs.

Cryptocurrency markets tend to have a strong positive correlation to US tech. Meanwhile, in a further sign of strong market risk appetite, precious metals reversed lower on Tuesday, with gold dropping about 1.5% back to the $1950 area per troy ounce.

Further helping the cause of cryptocurrencies in the last 24 hours has been a modest pullback in the US dollar and US yields.

Weighed by profit-taking, the DXY has on Wednesday pulled back to the low 100.00s having eclipsed the 101.00 level for the first time since March 2020 on Tuesday. Meanwhile, after nearing the 3.0% level earlier in the week, US 10-year government bond yields have dropped back below 2.90%.

A weaker US dollar is a tailwind to the price of USD-denominated cryptocurrencies, while lower bond yields reduce the opportunity cost of holding non-yielding assets (like precious metals and cryptocurrencies).

Upcoming Macro Risks

Whilst the recent upturn in sentiment in cryptocurrencies is, of course, a welcome development for the bulls, it remains far too early to call for an end to recent difficult market conditions.

The macro trends of a generally strengthening US dollar and a continued push higher in US bond yields (the DXY is still about 2.0% higher on the month while the US 10-year is higher by about 50 bps) as markets brace for a more aggressive Fed tightening cycle look far from over.

Fed Chair Jerome Powell will be speaking on Thursday and he should solidify expectations that the Fed plans to take interest rates quickly back to the so-called neutral level of 2.25-2.50%, including in 50 bps intervals at upcoming meetings.

But there is increasing chatter amongst Fed policymakers about the need to take interest rates well above neutral in order to tackle rampant US inflation and as this idea gains ground, the US 10-year yield could easily launch into the mid-3.0% area.

Crypto traders should thus be wary that until there is a substantial shift in tone from the Fed towards easier monetary policy and lower interest rates, which is unlikely to come until inflation is brought under control, crypto markets may continue to trade with a broadly bearish trajectory.