Altcoins and Net Liquidity

Analysts pessimistic about the crypto market base their arguments on declining liquidity. The liquidity theme was one of the factors that kept crypto prices under pressure since last year. Additionally, the SEC's rhetoric and actions also negatively affected the market.

Financial assets such as stocks and cryptocurrencies are affected by abundance or scarcity of liquidity. This relationship is much stronger on the cryptocurrency front, especially in altcoins.

The chart below shows the relationship between total crypto market value, excluding Bitcoin and Ethereum(Total 3), and net liquidity.

It is evident that the relationship is strong. So, which is the cause, and which is the effect? Because correlation may not always mean causation. When we sift through the chart, we see that the total market value of the altcoins (Total 3) follows the net liquidity.

So, what does net liquidity mean? According to the definition made by Max Anderson:

Net Liquidity = FED Balance Sheet - (Treasury General Account + Reverse REPO)

We can access the Net Liquidity variable, valid for the USA, via Tradingview. I want to remind you of the formula for the other variable.

Total 3(Altcoin Total Market Cap) = Crypto Total Market Cap - (Ethereum Market Cap + Bitcoin Market Cap)

To better understand the altcoin net liquidity relationship, we should consider that the chart above has two scales. Net liquidity, which was 7 trillion dollars in the first days of 2022, decreased to 6 trillion dollars in June 2022. In the same period, the total market value of altcoins fell from 1 trillion to 400 billion dollars. Liquidity creates a considerable multiplier effect in both negative and positive directions. Because when momentum occurs in altcoins, those who follow the trend ensure that the movement grows.

Another point that draws attention is that liquidity in the USA has fluctuated around 6 trillion dollars since last June. That means net liquidity does not decrease. We even see that net liquidity increases in 2023.

Although net liquidity increased significantly this month, prices in the altcoin market remained flat. Since the market cap follows liquidity, the altcoin market cap has the potential to rise to $500 billion. Realizing this potential will mean a 50% increase in altcoin prices. For the growth to occur, net liquidity must continue to increase or at least remain horizontal. And crypto investors need to be more optimistic. The bear market, which has lasted for nearly two years, has caused investors to be highly cautious.

S&P and Net Liquidity

The chart below shows that liquidity also affects the S&P index.

The chart shows the monetary expansion after COVID-19 can be followed through the red indicator. The blue-colored S&P index also followed the monetary expansion. With the decrease in liquidity in 2022, S&P also started to decline. On the other hand, the S&P liquidity relationship has deteriorated since May. Although liquidity has not changed much since then, S&P has rallied. This incompatibility will likely disappear after a while. The S&P may fall, liquidity may rise, or both events may occur.

TL;DR

Liquidity is a critical factor in determining the price movements of financial assets. The price and liquidity relationship is much more evident in altcoins. The main argument of those who expect a final price drop in altcoins is the decrease in liquidity. However, net liquidity in the USA has been fluctuating around $6 trillion since June 2022. Besides, we see that net liquidity increased by 3 percent in September.

Therefore, there is a possibility of a rise as well as a decline in altcoins. The actions of the SEC and developments in inflation will also have an impact on the market.

Investors are following a wait-and-see policy for now. On the other hand, as I mentioned in my previous article, technical indicators are improving rapidly, especially in Bitcoin. Liquidity conditions do not prevent altcoins from accompanying a possible Bitcoin rally.

Let's see how the autumn months will go.

Thank you for reading.