Ethereum, Altcoins See 'Outsized Drawdowns' Due to Macro Pressures

Altcoins have taken a hit over the past 24 hours, with major tokens seeing "outsized drawdowns" compared to Bitcoin. Experts say that this has largely been prompted by macro pressures pushing prices down.

With the market cap of all cryptocurrencies dropping by 2.5% to $2.8 trillion, Ethereum dropped by 5.5% to a $289 billion market cap over the past 24 hours, XRP fell by 5.1% to $82.4 billion, and Solana slipped by 3.8% to $60.6 billion. Meanwhile, industry leader Bitcoin has slipped by 3.1% on the day and 2.6% on the week, sitting at a market cap of $1.6 trillion.

It comes after the consumer price index rose 3.7% in the year to September, as Decrypt reported on Wednesday, with Myriad predictors pointing to a 28% chance of an October interest rate hike (Disclaimer: Myriad is a prediction market operated by Decrypt's parent company Dastan). 

Nick Forster, founder of options trading exchange Derive.xyz, said in a note shared with Decrypt that this shifted traders into "protection mode" as "hedging activity" on the platform doubled, and whales pulled back on optimistic bets made in spring.

"This immediate pull-back from long-term upside bets alongside aggressive short-term hedging shows a dramatic regime shift," he said, "with institutional participants rapidly reassessing their macro risk exposure as the path for interest rates turns murky again."

When markets react like this, Luke Nolan, senior research associate at CoinShares, says that altcoins are impacted the most.

"[It] seems to be high beta assets just got hit harder, similar to in equities as well, where the high flyers have seen outsized drawdowns in recent sessions," Nolan told Decrypt. "Alts are typically more sensitive to financial conditions, and tightening affects the premise of liquidity expanding."

Nolan also highlighted the U.S. dollar hitting a near 18-month high as a downward pressure on the entire crypto market. He said that over a medium-term horizon, crypto tends to have an inverse correlation to the US Dollar Index, or DXY. This is partly due to crypto being priced in dollars, Nolan explained, but also because a rising dollar causes a tightening in liquidity and a fall in risk appetite.

Max Shannon, senior associate at Bitwise Europe, told Decrypt that the slide is also a hangover from altcoins’ “strength and momentum” over recent months.

Since the start of October, futures open interest in altcoins (excluding Ethereum) has fallen by $8 billion, Shannon said. To him, that shows traders have “taken chips off the table,” which is a natural reaction after such a strong run.

That pattern is playing out with Ethereum, he added. ETH outperformed Bitcoin for three consecutive months, the first time it’s managed that since March 2021, and investors have been cashing in since. Ethereum ETFs saw 11 straight trading days of net outflows totalling $782.8 million, he said, before a brief inflow on Tuesday. Money has been heading back out since, per CoinGlass data, with $129.5 million in net outflows.

"This price action is more of a consolidation period for altcoins that have already done well," Shannon told Decrypt. "Altcoins generally tend to exhibit high correlations with BTC in tough times and lower correlations, especially with idiosyncratic catalysts, in better market environments. Hence, for the near term, it is possible that these altcoins trade in lockstep with BTC, albeit more sensitively."

For prices to recover, Nolan says he wants to see expectations of an interest rate hike in October to fall. Right now, he struggles to call a bottom for altcoins as he sees valid arguments for movements in either direction.

"I could see a situation where Bitcoin loses its support and altcoins likely bleed further," Nolan told Decrypt. "The opposite could also be true: this could be just a short-term correction, and we could be back into decent market conditions soon, which if Bitcoin was to push back decently above 80k, I could very well see an outsized up move for altcoins."