The cryptocurrency market is navigating turbulent waters once again. Bitcoin has dropped below the $104,000 mark, while Ethereum has slipped to around $2,400, repeating a pattern seen during past episodes of macro uncertainty. Altcoins have also taken a hit exhibiting a wider tendency of capital retrenchment and tentative repositioning among investors.

As the market faces volatility, XBTO Chief Investment Officer Javier Rodriguez-Alarcón has offered an insight into the new market structure. In an exclusive commentary, the former BlackRock and JP Morgan executive has highlighted how growing geopolitical tensions and macroeconomic expectations are influencing crypto trading dynamics and investor sentiments. 

Iran-Israel War and Upcoming FOMC Decision Drive Crypto Market Dip

Javier Rodriguez-Alarcón identifies two dominant factors behind the latest crypto market pullback. He explains that the unfolding tensions have pushed institutional capital into traditional safe havens like oil and gold. This shift leaves risk assets such as cryptocurrencies exposed to rapid drawdowns.

“The sudden and severe escalation of the Iran-Israel conflict introduced a significant geopolitical risk premium, prompting an immediate flight from risk assets across the board, to which crypto has not proven immune,” Javier remarked. 

According to Javier, the second major influence is investor caution ahead of the U.S. Federal Reserve’s upcoming policy meeting on June 18. The interest rate forecast remains at 4.50% ahead of the upcoming FOMC meeting. However, XBTO’s Chief Investment Officer claims that market players expect the Fed to keep interest rates unchanged. 

But, in that case, crypto investors will keep an eye in the dot-plot (forecast of future rate cuts). In case the U.S Federal Reserve signals less than two cuts, the high interest rates will prevail. This is bad for risk assets such as cryptocurrencies. However, a dovish rate cut could weaken the dollar making investors turn to cryptocurrencies. 

“With rates expected to stay on hold, traders are focused on the dot‑plot: fewer than two projected cuts would harden the higher‑for‑longer narrative; a dovish surprise would lighten the dollar and could unfreeze crypto’s bid,” Javier wrote. 

In contradictory predictions, market participants suggest that the crypto market could go up despite the decision announced by Fed Chair Jerome Powell. But until then, the crypto community must wait patiently. 

Investors are Selectively Rotating into Large Caps

Bitcoin (BTC) and Ethereum(ETH), which seemed relatively stable as the week kicked in, are finally showing signs of struggle. As at press time, Bitcoin has dropped by 3.7% to $103,914. On the other hand, the price of ETH currently sits at $2,475 marking a 6.3% dip, as per data by Coingecko. 

Despite the recent crypto market drop a more profound analysis by Javier shows defensive reposition in the crypto industry. For instance, the Market Factor, which is used to monitor the overall crypto market liquidity, decreased by 4.06%. This signals that crypto investors are experiencing significant losses in the altcoin market. Javier also believes that the drop is not associated with panic selling but rather “controlled de-risking”, where capital is leaving small, more volatile tokens.

The Beta Factor, which is a risk indicator measuring risk appetite, has also dipped by 0.62%. This further supports the notion of investor withdrawal. Simultaneously, the Size Factor dropped 0.55%, a signal that large caps like BTC and ETH are becoming safe harbors, a move Javier terms as “flight to quality.”

“Reinforcing the “flight to quality” narrative, the Size Factor dropped by 0.55%, confirming that investors are rotating out of smaller tokens and into established large-caps like Bitcoin and Ethereum,” he stated. 

Regardless of the broader weakness, the Momentum Factor posted a 0.54% gain with a Z-score of +0.96, showing that certain trend-following strategies are still working. This shows that some technical strategies are still catching gains, even as broader sentiment stays cautious. 

Regulatory Clarity to Offer Long-Term Foundation

XBTO’s Chief Investment Officer also points to progress on the regulatory front as a rare source of optimism. The U.S. is advancing the GENIUS Act, a stablecoin bill, and the bipartisan CLARITY Act, while the EU’s MiCA framework is already in force. Meanwhile, the UK is also preparing to allow retail access to crypto ETNs. 

Looking ahead, the market’s direction hinges on two volatile forces – the Middle East geopolitical tensions and U.S interest rate cut decision. A hawkish Fed could lift the dollar and push Bitcoin towards the psychological support point around $100,000. A dovish decision, on the other hand, might prompt a rally to new peaks. 

In turn, a de-escalation of the Middle East tensions could spark a relief for digital assets. However, deterioration of the situation could make the crypto market crash. Javier Rodriguez-Alarcón emphasizes that investors must express caution as the market awaits a better interplay of the macro-level drivers.