In a New Chapter for Crypto Diversification Matters

As the Trump presidency disrupts many previously held assumptions, crypto currencies are no exception. When the new US administration began, pledges of a US strategic digital asset reserve triggered a rally. Since then, though, the nature of the reserve has disappointed traders and crypto prices have been buffeted by the introduction of US tariffs.

Other forces, too, appear to be altering how Bitcoin especially trades. Notably, institutional investors are becoming more active investors, and spot cryptocurrency ETFs have proved extremely popular since they were allowed in the US in 2024.

Taken together, these developments seem to have broken the four-year crypto market cycle. As they do so, they’re ushering in a new era for cryptocurrencies, where Bitcoin’s price may be driven by factors related to financial and monetary liquidity, while other crypto assets remain subject to a combination of speculation and fundamental factors.

This shift is a natural consequence of the movement of Bitcoin to the investment mainstream, and one that investors can adjust to by diversifying across a range of cryptocurrencies.

A Break with the Four-Year Bull-To-Bear Cycle?

Before the changes of the last 18 months, cryptocurrencies appeared to have a predictable trading cycle, swinging from bull to bear market over four years. Historically, the bull market ended in a euphoria phase and the bear market with an accumulation phase.

Underpinning this was Bitcoin’s halving cycle – an event that takes place about every four years, lowering the supply of Bitcoins entering the market. This increases scarcity and has historically pushed up the price of Bitcoins and altcoins, as other cryptocurrencies are known. Of course, it could be that the halving cycle was just coincidental, simply driven by human psychology.

But in cryptocurrencies’ new era, more powerful forces are at play. The involvement of institutional investors, popularity of ETFs and political interest are driving strong inflows and outflows. The last Bitcoin halving event took place in 2024, yet the post-halving bull market that should have followed has failed to materialize.

Instead, the price of Bitcoins appears to be tracking that of the global M2 money supply – defined as liquid, near-cash assets – with a lag of 10-12 weeks. This change supports the theory that flows of money, linked to institutional investor and ETF flows, are now the primary drivers of the Bitcoin price.

Meanwhile, altcoins remain truer to their roots. Their prices are influenced by fundamental factors such as how the adoption of the cryptocurrency in question is driving supply and demand. This independence from broader market factors reinforces their potential role as assets that can diversify investment portfolios.

The Bitcoin price has far outperformed that of altcoins since the beginning of 2024, lifted by investor inflows as it enters the mainstream. This rise has come as some institutional investors have awarded Bitcoin a small part in their strategic asset allocation.

The Case For Diversification

Even so, an investor considering a strategic investment in cryptocurrencies for the first time might be wise to take advantage of altcoins’ lower correlation with traditional financial markets. Investing in a basket of cryptocurrencies has, historically, smoothed out the volatility of investing in Bitcoin alone, though it can also expose investors to underperforming assets.

ETPs offer a way to diversify without going through the difficult process of buying individual cryptocurrencies.

It’s an electrifying time for cryptocurrencies, with their fortunes lifted largely by the US approval of ETFs and the move towards a US strategic digital asset reserve. For investors allocating part of their portfolios to these assets, taking a diversified exposure may prove the best way, nevertheless carries the risk of significant market volatility and regulatory uncertainty.