Wen Altcoin Season?

Not today – everything is in a sea of red, with barely any tokens in the top 100 by market cap escaping a red return over the last 7 days except stablecoins. As ever, market choppiness is helping bitcoin dominance in a flight to (relative) safety.

Historically speaking, bitcoin dominance can only last for so long. In each of the previous two cycles, the rest of the crypto market has outperformed BTC from the 250 day post-halving mark. We’re currently at 268 days since April 2024’s halving event, so definitely overdue a switch to more risky coins. However, oscillations in bitcoin dominance over the crypto market cap in this cycle have been small, and largely attributable to the resurgence of XRP.

It’s tempting to point to the macro picture to explain why. Expectations for the next Fed cut have now been shifted to July, compared to the beginning of the year when markets expected a pause in January and the Fed resuming their cutting cycle again in March. Given the stellar labour market data received throughout much of last week, crypto-markets will likely react positively should CPI come in below expectations as it would once again open the conversation up to a less restrictive monetary policy path.

However, Wednesday is expected to show headline CPI ticking upwards too – from 2.7% in November to 2.9% YoY, and for the core CPI to remain flat at 3.3%, its 5th month at this level. This certainly matches the view of consumers whose forward looking inflation expectations over the next 5-10 years, according to a University of Michigan survey on Friday, rose to 3.3%, up from 3.0% in November.

The week ahead is important globally for inflation data, with reports expected not just in the U.S., but in Europe and the U.K. too. In Europe, the flash estimate for December inflation showed headline inflation ticking up to 2.4%, from 2.2% in November, largely due to base effects from energy prices in the previous year. ECB Governing Council Member Olli Rehn said that the ECB should continue cutting rates given the weaker growth outlook in Europe and that the ECB “is not the 13th federal district of the Federal Reserve system”, hence should not have its cutting cycle derailed by a more hawkish Fed.

Friday’s daily comment covered that China is tackling the opposite problem to most major economies – having flirted with deflation since 2023. The PBOC has been conducting bond purchases on the open market since October and via new reverse repo agreements in order to inject much needed liquidity into the Chinese economy. This has strongly contributed to a widening interest-rate differential between U.S. yields and Chinese yields (with the former offering a nearly 3x higher yield currently), a spread that has moved in eerie lockstep with BTC throughout 2024.

Last Friday however, the PBOC paused its program of longer-dated bond buying, relieving some of the pressure on yields, though this was an intra-day reaction as 10Y Chinese yields ultimately ended the day higher. This move however emphasises the fragile position in China currently – a tug of war between the need to loosen monetary policy and a reluctance to see government yields drop towards 1%.

Last Friday however, the PBOC paused its program of longer-dated bond buying, relieving some of the pressure on yields, though this was an intra-day reaction as 10Y Chinese yields ultimately ended the day higher. This move however emphasises the fragile position in China currently – a tug of war between the need to loosen monetary policy and a reluctance to see government yields drop towards 1%.

The resulting macro picture leaves the crypto outlook quite bearish in the short term. Options markets have increased their skew towards puts at short tenors once again. As the charts below highlight, we’re seeing this in both BTC and ETH as both are hitting December’s bearish skew lows.

While Trump’s inauguration is expected to herald a positive era for state-side regulation, global regulation is less rosy this week – Bybit has restricted most of its services for India from January 12 due to regulatory changes and pending registration. Users can still withdraw funds, but new trades and many features will be on hold until the process is finished. Singapore, which has strict unlicensed gambling restrictions, bans Polymarket, warning users to stick to the state-approved Singapore Pools or face the threat of fines, jail time, or both. Mango Markets has announced they’re shutting their Mango v4 & Boost protocol down today after an SEC settlement forced the decentralized autonomous organization (DAO) to destroy MNGO tokens and delist them. With this, most borrowing on the platform will no longer be “economically viable” hence the shutdown.