Alts trading sideways

Macro

Alongside Hormuz, trade wars and the FOMC, we now also have the U.S. bond market to keep an eye on. Recently, the US treasuries falling with yields spiking wit the 30y at 5.6% and 10y near 5.35%, the highest level since 2008. Despite some rate cuts coming, it's really the back-end of the curve that is steepening.

What this ultimately means for crypto and other risky assets is that they will be under pressure because of higher yields raising the opportunity cost of holding non-yielding, long-duration assets and draining liquidity, however over the past few weeks these have so far defied gravity. Looking at the cross asset performance this week, the main observation is that altcoins are down for the first time since the start of August.

What we also note is that the correlation between Bitcoin and equities is on the rise again after largely decoupling for the past two months. While there is no real read across for volatility of performance, it changes the risk profile of BTC.As we’ve discussed before, historically when correlation is high, BTC has a negative skew to the equity markets meaning that when equities sell off, crypto gets proportionally more dragged down alongside it versus benefitting on the way up.As a result it’s just important to know the potential risks and drawdown of the equity market in this environment. So as a quick recap, where are we? Here a refresher.

• Rates - The Fed raised rates 25bp to 3.75%-4.00% on September 16. The debate is now where longer term rates will land while the back end of the curve is steepening.
• Equities - Higher yields are hurting small caps, utilities, financials, etc while AI and semis continue to absorb excess capital. Only ~45% of the S&P500 stocks are trading above their 200d moving average, making the index relatively narrow.
• Oil and geopolitics - The Iran conflict continues and Trump rejected Iran's proposal to reopen the Strait of Hormuz. Inconsistent US messaging on the war is part of why the Fed won't treat the energy inflation shock as temporary.
• Earnings: Q3 S&P earnings growth estimates are around 29% y/y and still rising, so the economy is not breaking.

Where does this leave us? The market is wrestling with a stagnation-flavored mix of weakening jobs, sticky inflation, a Fed that is hiking and surging long-end yields, offset by an AI capex and earnings story.

We’d be tilted bullish here if yields ease which feels like it could be the case after the mid term and after a strong Q3 earnings season. In that case, the environment in which most of the risky assets such as equities and crypto have performed, remains relatively unchanged. The outcome is obviously different if the bond situation continues to spiral.

Digital Assets

BTC's correlation to the SPX is rising after breaking down six weeks ago, and while we found no significant relationship between that rise and performance or volatility, the risk profile changes. In high-correlation regimes BTC trades as a high-beta version of the SPX with a negative skew, falling with equities while rarely participating equally on the way up. We therefore weigh macro drawdown risk above crypto-specific catalysts for now.

Looking at BTC, two weeks ago we broke out of the $76k to $82.5k range and has traded higher for two weeks, with last week's retest of the $82.5k range high confirming the flip. The next test on the upside is the early-January levels around $90k to $95k, where BTC was rejected at the December range high of $94k to $96k as the start-of-year euphoria sold off quickly. Whether BTC gets there depends more on macro than it did when it bounced off the August cycle lows.

Looking at the altcoins and the top 250 tokens next. In the exhibit below we look at the number of new tokens in the top 250 on a rolling basis to contextualize the altcoin market environment. Today, based on the top-250 entrants, we would believe we’re in the early part of a cycle, as post-bear narratives get discovered and market cap rises with the count of new names (see 2024 with DePIN/AI and early 2025 with Memes and Agents), a pattern that also played out in 2020 to 2022.

While it confirms the early cycle narrative from a different angle, it’s also important to note that these alt rallies within bull markets generally only last 3-4 months and we think the current one is relatively mature already. Lower-tier tokens are now rallying mainly because they lagged and that is what the late stage of a micro rally looks like. All while breadth shows the same stretch we flagged two weeks ago.

Our take:

“We stay moderately bullish into the midterms with yields as the swing factor, and we would not chase lower-quality alts”

We are moderately bullish if yields ease, with the midterms on November 3 a month away and the most likely point for the long end to settle once the current peak in uncertainty passes. Strong earnings mean lower yields would pull capital back into the beaten-down rate-sensitive names, driving the next leg up in equities and taking crypto with it. Until then BTC's rising correlation to the SPX means macro drawdown risk outweighs anything crypto-specific.

The alt market looks stretched, with the high-quality names flat to lower over 14 days while micro caps keep rallying, because capital is rotating out of them into whatever has lagged, which points to exhaustion and froth in the micro rally. We still expect the names below to be among this cycle's blue chips, and with the broader cycle early there will be more opportunities, so we would not chase lower quality for not having re-rated.

We would be wrong on the macro call if the 30y yield continues to spiral. On alts we would soften if the 14-day leaders turn positive while micro caps stop outperforming. If, in a bullcase scenario, we claim low $90s in BTC very soon, we’d be confident in the further extension of this altcoin rally but for now it starts to feel like it could use a little breather.