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. 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.” 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.
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. 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. When Bitcoin’s price fell to $92,000 in late December, plummeting from its record price of $108,000 just three days before, liquidations spiked. The pullback, which coincided with the Fed’s shifting outlook on rate cuts, sparked $1.4 billion in liquidations, according to CoinGlass.
What’s more, margin calls and stop orders can exacerbate price swings at the exchange level, Acuña-Rohter said, describing them as potentially potent risk management tools due to the overall structure of the crypto market, which is spread out across numerous exchanges. “In crypto, [markets] are very fragmented,” he said. “Exaggerated movements can become even more exaggerated, not just from the macro factors, but these micro-like risk management tools.”
Edited by Andrew Hayward