Arca Chief Investment Officer: Can we believe that the "copycat season" is coming?

FOMC rebound

At the end of August, we discussed the signs of recovery we were seeing in the markets and how cryptocurrencies would inevitably catch up to the ongoing rally in gold, US Treasuries, and global stocks. However, cryptocurrencies plunged 20% the following week. Many, including us, were taken aback by the price action in late August/early September. But the FOMC came to the rescue. While the world debated whether it was 25bps or 50bps, in the end it didn’t matter. Either way, the drama was long. The rate cuts finally came, and Powell firmly stated in his press conference that the Fed wanted to be ahead of the curve, not behind it.

Treasury yields have been anticipating this rate cut for months. Since May, the 2-year Treasury yield has fallen by more than 150 basis points.

Source: TradingView

While treasuries, gold, and stocks simply need confirmation of what they already know, cryptocurrencies need a real catalyst. While this isn’t the most exciting reason for digital assets to rise, it is the spark that the market needs.

But what’s interesting is that in a year led by Bitcoin, Solana, and a handful of memecoins and newly minted tokens, the market took the Fed’s cue and bought up beaten-down “altcoins.” Now, I hate the term “altcoin” because it doesn’t adequately differentiate between sectors, themes, and individual coins. But sadly, this past week, it probably accurately described last week’s rally. There really is no theme, sector, or reason for the massive rally in many of the less mainstream coins. If it was beaten down, it probably would have been up last week.

Given the many false alarms we’ve seen this year, it’s natural to question whether this rally can last. So, let’s look at some factors that could help determine the answer:

Macro – Extremely Bullish

The correlation between digital assets and stocks is at its highest level in two years, so there is no doubt that macroeconomics is driving this progress right now.

Source: FalconX

At present, the positive macro factors are quite obvious.

• After several spikes in panic, the VIX index fell back to around 15%

• Stocks and gold hit record highs

• US Treasury yields are falling again, with the 10-year yield now comfortably below 4%

• The dollar continues to fall

• Corporate credit spreads approach tight levels again

• Geopolitical risks are relatively small

• The Federal Reserve has left markets in no doubt that it will slash interest rates to combat the recession.

All of these factors are very bullish, no doubt. Obviously, the next few quarters will tell us if the Fed has indeed achieved a soft landing, but for now, at least until the election, the picture is pretty clear. Of all these factors, I think the high crypto/stock correlation is probably the least bullish, as it means that the digital asset industry doesn't have a lot of catalysts for crypto right now.

Cryptocurrencies: Slightly Bearish

While the macroeconomics paints a bullish picture, factors specific to cryptocurrencies make it hard to get excited. On the positive side:

• ETF inflows have been mixed. While inflows have been positive recently, they have their ups and downs and cannot really be relied upon.

Source: Coinshares

• The oversupply caused by the bankruptcies of cryptocurrency companies such as Mt. Gox and Celsius, as well as selling pressure from the U.S. and German governments, has largely dissipated. The lack of sustained selling pressure can be seen as a modest positive.

• There has been an increase in dispersion. We are starting to see a small “alt rally” led by a seemingly random collection of tokens. For example, in DeFi, Aave (AAVE) is now +37% MTD, but other DeFi tokens haven’t really followed suit. Bittensor (TAO) leads all AI tokens, now +97% MTD. Sui (SUI) has become the popular 0, 1, or 2 layer VC token, now +106% MTD. Immutable X (IMX) is actually the only gaming token that is up, +37% MTD. Aerodrome Finance (AERO) is +65% MTD, as it is the only way to get access to the rapid growth in Base activity. Drift Protocol (DRIFT) is +58% MTD, partly due to Multicoin’s investment announcement and partly because there is no way to invest in Polymarket, and Drift is the next best thing in prediction markets. The fact that there is some real separation between tokens is certainly a modest positive.

But the positives for cryptocurrencies end there. The biggest problem with this rally is that there has been no real news other than the Fed.

• The Token 2049 conference and the Solana Breakpoint conference in Singapore failed to announce any major initiatives. Given the large attendance, the content of these events was almost lackluster. Katie Talati, the site lead of Arca, barely contacted the parent company because there was no news worth reporting.

• Exchange volume, while off its lows, remains well short of the levels we typically see during more prolonged and significant rallies.

Source: Arca internal calculations

• And most of the buying interest is based on futures rather than spot. This means that there is actually no new money entering the asset class. Instead, most of the buying pressure is speculation using leverage. Futures open interest and financing rates are both rising.

Source: VeloData

While the market can certainly move significantly higher simply due to underperformance relative to other asset classes and a bullish macro backdrop, we need to see some real money coming into the system coupled with some crypto-specific positive events. The November election could be that spark, as many good crypto ideas are currently unable to materialize due to regulatory pressure.