Bitcoin (BTC) has shown resilience and performance following the Federal Reserve’s recent decision to lower interest rates. This decision, made on a Wednesday, has not only impacted Bitcoin but also significantly influenced the broader cryptocurrency market, particularly altcoins. In the hours following the announcement, Bitcoin’s market capitalization rose by 4.4%, reaching levels around $64,000, a price point not seen since late August. However, the real standout performance came from altcoins, which saw an increase of 5.68%, as measured by Total3, an index that tracks the market capitalization of the top 125 cryptocurrencies, excluding Bitcoin and Ether (ETH).

Bob Wallden, head of trading at investment firm Abra, explained that altcoins are generally considered to be higher beta assets compared to Bitcoin and Ether. This means that they tend to exhibit greater volatility and can experience larger swings in price, making them a leveraged play on the overall performance of the cryptocurrency market. In many ways, this mirrors the behavior of technology stocks, which often outperform the broader S&P 500 index during periods of market recovery or ‘green shoots’.

One significant factor contributing to the strong performance of altcoins is their recent history of overselling. According to Wallden, this overselling creates a scenario where investors are more likely to react positively to price movements, adding velocity to the recovery of altcoins. This phenomenon is particularly evident in the current market, where liquidity levels for altcoins are relatively low. Bohan Jiang, Head of OTC options trading at Abra, noted that the low liquidity in altcoins results in greater price volatility. When risk assets perform well, altcoins tend to experience outsized gains, thanks to their positioning at the fringes of the liquidity spectrum.

Furthermore, the relationship between liquidity and price performance is critical in understanding why altcoins are currently experiencing a surge. Jiang elaborated that the liquidity in altcoins is significantly poorer than that of Bitcoin and Ether, which leads to pronounced movements in both directions. Over the past few months, a buildup of extended short positioning has occurred, setting the stage for a potential short squeeze. This dynamic can drive altcoins to outperform more established cryptocurrencies when market sentiment shifts positively.

In summary, the Federal Reserve’s decision to lower interest rates has created a favorable environment for both Bitcoin and altcoins. While Bitcoin remains a dominant player in the market, the altcoin sector is capitalizing on the recent volatility and recovery momentum. As liquidity improves and sentiment shifts, altcoins may continue to outperform Bitcoin in the coming weeks. Investors should remain vigilant and consider the unique characteristics of altcoins, such as their higher beta nature and the impact of liquidity, when making investment decisions.

Kris Sandor contributed to the story.