Why Are Crypto Investors Rotating From Bitcoin To Altcoins?
The crypto market is pulling back to support and could face potential headwinds in the short term. In the crypto top 10, Bitcoin has outperformed the altcoins sector with Ethereum and Binance Coin, and Polkadot has still maintained some of its gains from the past week.
This shows a shift in crypto market dynamics as investors seem to regain confidence in the sector and move away from Bitcoin. Therefore, the number one crypto by market capitalization appears to be lagging behind, which translates into a decline in Bitcoin dominance.
As shown below, this metric has moved sideways since May 2022 after seeing a small push to the upside. In 2021, when Ethereum and other altcoins reached new all-time highs, Bitcoin dominance fell to its current levels.
If current trends continue, Bitcoin lagging the altcoin sector, the metric could retest its annual lows and fall from 43% to the high 30% range, which could give altcoins more room to regain previously lost territory.
According to a report from Arcane Research, their crypto indices for altcoins have shown positive returns in August. As shown below, the research firm records 9%, 7% and 5% gains for their Large, Mid and Small Cap Index, while Bitcoin records 2% gains.
The latter shows the largest increase as risk exposure trends upward, and stablecoin market share follows a similar trajectory to Bitcoin dominance. Arcane Research noted:
With bitcoin underperforming relative to altcoins, bitcoin dominance has fallen from a peak of 47% in mid-June to 40.5% now. As market sentiment has improved, traders have been more interested in gaining exposure to altcoins than bitcoin.
In the crypto market, altcoins may continue to dominate in the short term as BTC’s price moves sideways. Therefore, investors seeking higher returns may consider rotating to Large to Mid-cap cryptocurrencies, and Small Cap if they have a greater risk tolerance.
Why is the crypto market seeing short term downside price action
Despite a positive month for the majority of the crypto market, most cryptocurrencies are experiencing downward price action on low timeframes. This is due to the potential short-term effect of the macroeconomic factors affecting the sector.
Tomorrow, the US central bank (Fed) will publish July’s consumer price index (CPI). This metric is used to measure inflation in the US dollar, which has been trending upward and has been at a 40-year high.
Thus, the Fed has raised interest rates and changed monetary policy in an attempt to slow inflation. If July’s CPI print suggests success in these efforts, the financial institution may be inclined to act less aggressively.
This could lead to stronger bullish momentum across risk assets, such as Bitcoin and the crypto market. Meanwhile, market participants seem to be standing on the sidelines, anticipating tomorrow’s outcome. A pseudonymous trader so the following on the above:
CPI ratio to Bitcoin. Now that gas prices are falling, we will see a slowdown or inflation holding/cooling off. This will restore confidence to investors. The Fed rate will be cut to 50 bps at the next FOMC meeting, which shows optimism to investors. Don’t get shaken out before you move up.
