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Why Altcoins Appear More Sensitive to Macroeconomic Data
Ever wonder why so-called altcoins appear more sensitive to macroeconomic data than Bitcoin? According to Matt Mena, a crypto research strategist at the Swiss-based asset manager 21Shares, traders can look to George Soros, the American investor and philanthropist who famously broke the British pound back in 1992.
Soros began developing his theory of reflexivity in the 1950s, and while the trading concept has roots in traditional finance, Mena told Decrypt that it can be applied to crypto as well. Effectively, Soros’ theory of reflexivity centers on feedback loops among investors, where price movements influence their behavior, which in turn affects prices further.
The Theory of Reflexivity in Crypto
When it comes to digital assets beyond Bitcoin, those with relatively smaller market caps like Ethereum and Solana are more speculative in nature, making them particularly susceptible to reflexive cycles, Mena said. As expectations of Fed rate cuts have driven markets over the past week-plus, indeed cryptocurrencies beyond Bitcoin have faced greater volatility.
“When macro data signals improving liquidity, such as the potential for Fed rate cuts, it often leads to increased risk-taking,” he said. “This inflow of capital into altcoins, driven by the expectation of higher returns, tends to magnify price movements.”
Real-World Examples of Reflexive Cycles
Following Wednesday’s inflation snapshot, which assuaged inflation concerns, Bitcoin price rose 3.8% from $96,800 to $100,500 over the course of around 12 hours. Meanwhile, Ethereum and Solana jumped 7.1% to $3,450 and 10.7% to $206, respectively.
Why Bitcoin is Less Susceptible to Reflexive Cycles
By TradFi standards, Bitcoin is volatile. But the asset is more established than its crypto counterparts with greater institutional adoption, making it less susceptible to the reflexive trend, Mena said, adding that its reputation as “digital gold” provides somewhat of a buffer.
Other Factors that Can Cause Chain Reactions in the Crypto Market
While Soros’ theory of reflexivity can help explain altcoins’ outsized swings, Tony Acuña-Rohter, the CEO of EDX Markets, an institution-only crypto exchange, told Decrypt that there are other factors that can cause chain reactions in the crypto market—such as liquidations.
Liquidations occur when an exchange forcibly closes a trader’s position, often due to insufficient funds to cover a leveraged position. By borrowing funds from an exchange, leverage trading allows traders to control a larger position, amplifying potential returns and losses.
Conclusion
In conclusion, the theory of reflexivity can help explain why altcoins appear more sensitive to macroeconomic data than Bitcoin. By understanding the mechanisms behind reflexive cycles, traders can better navigate the complex world of cryptocurrencies and make more informed investment decisions.
FAQs
- What is the theory of reflexivity in crypto? The theory of reflexivity, developed by George Soros, suggests that price movements influence investor behavior, which in turn affects prices further.
- Why are altcoins more susceptible to reflexive cycles? Altcoins, such as Ethereum and Solana, are more speculative in nature and have smaller market caps, making them more prone to reflexive cycles.
- Why is Bitcoin less susceptible to reflexive cycles? Bitcoin is more established with greater institutional adoption, making it less susceptible to the reflexive trend and having a “digital gold” reputation that provides a buffer.
- What are some other factors that can cause chain reactions in the crypto market? Other factors, such as liquidations, margin calls, and stop orders, can also cause chain reactions in the crypto market.
Note: The FAQs section is formatted as an ordered list with four questions and answers.
