Fed & Debt Risks Loom Over Bitcoin, Altcoins Outperform & Gauging Blockchain Activity

Jim Ferraioli (1:30)

Over the summer, what really sparked the crypto rally was when the Treasury Secretary announced he was expanding the size of Treasury buybacks. And that really reignited some of the fuel behind the debasement trade narrative. And so with US debt, that's about $40 trillion, which is now larger than the US economy, every time the Fed raises interest rates, that actually increases the cost of servicing that debt. And so if we have over $1 trillion in annual expenditures on debt already, and we run a $2 trillion deficit, and so again, this has reignited the debasement trade narrative in cryptocurrencies. And so maybe that could serve as fuel heading into year end.

But if prices got ahead of themselves, over the past couple of weeks, we've actually seen a big rise in altcoins. And so normally, and maybe other asset classes, you would point to strong breath as a positive and a sign of a healthy market. But in crypto markets, actually, it can be viewed as a contrarian sign. Early in crypto bull markets, typically, there's more narrow leadership among Bitcoin and some other large cap cryptocurrencies. Over the past few weeks, we've actually seen 90 percent of the top 25 largest altcoins that we track, they've actually outperformed Bitcoin on a relative basis. Again, if we look at periods over the past couple of years, where we've seen this level of outperformance in altcoins, the first would be last October when we actually saw our broader bull market peak. The other period over the past few years that we've seen this level of altcoin performance was in January 2025 when the new administration was getting back to DC. Again, the market was under the view that this was going to be a positive administration in terms of crypto regulation. We had a big altcoin rally. It doesn't mean that the bull market is over, but it does suggest that the broader crypto market could take a breather and Bitcoin could potentially regain some of its strength over the coming weeks.

One thing that adds some evidence to this thesis is, if you look at the relative momentum of these altcoins, that's actually started to decline off the high levels that we saw over the past month or towards a more neutral level. Typically, what we've seen is relative strength momentum leads the level of relative strength. Again, it adds evidence to the idea that Bitcoin could assert more leadership over the short term.

These are some things that you should consider heading into year end. That said, we should also think about what's happening from a fundamental perspective.

Prices are rallying, sentiment is rising, but what are we actually seeing in blockchain data? We look at the 42 largest layer 1 and layer 2 blockchains. What we saw was in August, there was a large spike in on-chain activity. So that tells you that users were using different applications, and there was something that supported the altcoin move. However, since the early weeks of September, that activity is really reverted back to pre-August levels. So that tells us that on-chain activity has not kept up with prices. So again, this lends evidence to the idea that we are a little bit more cautious on altcoins tactically here and that Bitcoin could regain its relative strength over the coming weeks. And so that's what we think investors should be aware of as we head into fourth quarter. There are some things that could continue to weigh on the crypto markets. If investors perceive the rate hike cycle as the Fed seeking to crush inflation, that could overpower the whole debasement trade narrative that would probably be a negative for crypto prices. And who knows what happens with midterms. Recently the Clarity Act failed in the Senate. We have the view that it is unlikely to be revived in the short term. Now absent the Clarity Act passing, several regulators who have been focused on the space for several years, they stepped in and they're actively providing guidance. Some have pointed to the positives here that these are regulators who have been very focused on them. And so you are going to get very focused and narrow legislation or interpretations of existing legislation specific to cryptocurrencies as opposed to a formal bill in Congress, which can often have a lot of little extras added to it. And so you do get a very narrow focus when the regulators take their approach to regulating these markets.

And so the reason we highlight this is we are heading into an election. And depending on the outcome of powers in Congress, while we do still remain of the view that crypto does have bipartisan support in Congress, if there is a change of power in the House and the Senate, it could also result in a change of legislative priorities. And so again, we aren't of the viewpoint that in the near term, the Clarity Act will be brought back into the spotlight, regardless of what happens with midterms. But the market and investors could interpret maybe a change in Congress leadership as a negative in the short term. So something to be aware of. So that's all we have this week for CryptoConnor. Make sure to check in next week.