Market Wrap: Bitcoin Stabilizes as Altcoins Underperform; Expect More Volatility

By May 12, 2022DeFi
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Bitcoin (BTC), the world's largest crypto by market capitalization, experienced a sharp decline toward $25,402 on Thursday. The cryptocurrency stabilized later in the New York trading day, but is still down by 20% over the past week.

Wild price swings have been the norm over the past few months, which left many alternative cryptos (altcoins) vulnerable to extreme selling pressure. In down markets, alts decline by more than bitcoin because of their higher risk profile.

For example, Solana's SOL token is down by 46% over the past week, compared with a 30% decline in ether (ETH) over the same period. And BTC declined less than several alts over the past 24 hours, indicating a lower appetite for risk among crypto traders.

Meanwhile, on Thursday, the price of Terra's blockchain token LUNA plunged below 2 cents. The sharp price move made the network vulnerable to governance attacks, which triggered a brief shutdown of the blockchain, which meant no transactions with the algorithmic stablecoin UST, LUNA or Terra's other cryptocurrencies could be processed.

"The more considerable risk is in another bout of market panic, caused by the macro environment and exacerbated by LUNA-driven risk that could lead to BTC and ETH losing support," Sean Farrell, vice president of digital asset strategy at FundStrat, wrote in an email.

"There could be significant negative repercussions for cryptocurrencies and digital finance if investors lose confidence in stablecoins," Fitch Ratings wrote in a Thursday report. The firm expects increased calls for stablecoin regulation going forward, especially as many regulated financial entities have increased their exposure to digital assets (including decentralized finance) in recent months.

Bitcoin (BTC): $28,635, −2.34%

Ether (ETH): $1,945, −7.89%

●S&P 500 daily close: $3,930, −0.12%

●Gold: $1,824 per troy ounce, −1.57%

●Ten-year Treasury yield daily close: 2.82%

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at

The chart below shows a short-term breakout in the bitcoin dominance ratio, or BTC's market cap relative to the total crypto market cap. The ratio typically rises in down markets as BTC experiences less selling pressure relative to smaller tokens.

A reading around 50% in the dominance ratio could signal a prolonged risk-off environment. For now, market conditions are still neutral as alts have gone in and out of favor over the past year. That suggests traders are still finding short-term opportunities to add risk, albeit with less conviction compared with last year's bull market.

Bitcoin dominance ratio (Damanick Dantes/CoinDesk, TradingView)

Ether s down by 11% over the past 24 hours, compared with a 4% drop in BTC over the same period. The underperformance of ETH relative to BTC typically signals risk-off conditions.

The chart below shows a downtick in the ETH/BTC price ratio below its 40-week moving average. The ratio could remain under pressure, especially if cryptos and equities fail to stabilize over the next few weeks.

ETH/BTC price ratio weekly chart (Damanick Dantes/CoinDesk, TradingView)

For example, after a rapid three-day decline of more than 12.5%, BTC tends to exhibit short-term weakness, according to Nautilus Capital. The firm highlighted nine similar downswings in BTC's price over the past five years – a small sample size, although enough to show volatile conditions are expected to persist.

  • Terra restarts blockchain after brief shutdown: The Terra blockchain restarted around 1:45 p.m. ET Thursday after validators briefly halted the network to implement a patch that would prevent new actors from staking on it after the luna token (LUNA) fell to below 2 cents earlier in the day. Terraform said the price of LUNA fell too low to "prevent governance attacks," citing LUNA inflation as one factor. Read more here.
  • Terra proposes token burn: Terra believes decreasing the amount of UST in circulation while increasing the amount of available LUNA is the easiest way to return the UST to its dollar peg. “The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads,” said Terra in a tweet. Read more here.
  • PancakeSwap to reduce CAKE supply and boost farming rewards: Decentralized Finance (DeFi) application PancakeSwap has released a governance proposal that outlines a roadmap for its native token, CAKE. The proposal, which was passed with a 98.8% majority across 11 million votes, suggests imposing a supply cap of 750 million for the CAKE token. CAKE currently has a circulating supply of 295 million. The maximum supply is expected to be in circulation within the next three to four years. Read more here.

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