As the much anticipated altseason seems elusive in the current cycle, investors wonder whether it is worth looking beyond Bitcoin and investing in the “rest of the market.”
The outperformance of altcoins over Bitcoin has been a mark of past crypto bull cycles. In the current cycle, altcoins have been lagging Bitcoin substantially, and the “altseason” appears to be postponed.
Relative performance of S&P Broad Crypto Market Index vs Bitcoin
(Cumulative performance from inception of the index, 28/2/2017)
Source: CoinMarketCap, S&P Global
The opportunity
As with any technology, the potential of the revolutionary decentralised ledger technology will be realised through real world use cases. While cryptocurrencies used as money or a store of value are important use cases, this is mostly limited to Bitcoin and, to a much smaller extent, a very short list of cryptocurrencies. The bar is very high for an asset to be widely accepted as money and even higher for acceptance as a safe haven asset. The “digital gold” description is mostly limited to Bitcoin at this point, with some traction for Ethereum as “ultrasound money” and a treasury asset.
The opportunity for Bitcoin’s growing acceptance as a store of value is still substantial as investors diversify safe haven holdings, and there are even some suggestions that central banks may add it as a reserve asset at some point. The use of cryptocurrencies in transactions is also likely to grow. Unlike gold, crypto assets are easy to use in payments.
However, a far greater opportunity lies in very wide ranging applications of the technology across many sectors of the economy. Decentralisation and transparency are very powerful concepts because they safeguard against the potential for abuse and dysfunction inherent in opaque centralised systems. In certain cases, decentralised systems are also more efficient as they eliminate the need for intermediaries required to create trust, thereby saving time and costs. These opportunities will be realised through a multitude of use cases over time, and while the underlying blockchains these applications build on will also benefit, most of the value will accrue to the tokens of the applications, as well as the tokens of protocols that are built to facilitate these applications.
In the long run, the “rest of the market” is very likely to outperform Bitcoin.
Still early stage
As use cases emerge, the dominance of Bitcoin is in a structural decline. As the first crypto asset, Bitcoin’s dominance started at 100 percent and has declined to around 50 percent since. The emergence of the “rest of the market” accounting for approx. half of the crypto universe is evidence that the market is acknowledging the opportunity of use cases and applications.
However, crypto use cases are still in their infancy. The use of stablecoins in payments and real-world asset tokenisation have real traction, with large traditional institutions investing heavily and governments providing support, but the volumes these protocols execute are still very small relative to their traditional counterparts.
Decentralised finance is a use case that has established itself with a multitude of projects generating sustainable revenues. However, most of the DeFi industry services the crypto market itself (trades, lends, insures crypto) rather than competes with its traditional counterparts.
The growth of other applications that have found a product/market fit is often slowed by various factors: a lack of regulatory clarity, the challenge of getting to critical mass and powerful network effects, being held back by the remaining limitations of the underlying infrastructure in terms of scalability or interoperability, or not having found the optimal economic model for balancing the incentives for early stage investors, tokenholders, users and developers.
However, the pace of innovation in the crypto space remains strong, fuelled by highly motivated developers and the good availability of funding for this industry. Many past challenges with regard to the technology, governance and economic models have already been resolved through innovation, and it is expected that the remaining challenges will also be overcome with time.
Cyclicality
Although there is an overarching trend for the “rest of the market” to grow in relative size, this is not realised in a straight line. There have been multiple cycles of excitement around various use cases and applications, followed by a degree of disappointment. This cyclicality is unsurprising, as exuberance can reach bubble-like proportions around emerging narratives for applications where the magnitude of future growth is hard to pinpoint.
The pattern of altcoin outperformance has been fairly consistent until now across crypto market cycles. Bull markets have always started with Bitcoin leading and outperforming for a period of time, followed by the rest of the market catching up and surpassing Bitcoin and the majors. This is in part driven by capital rotation, as confidence in the bull cycle is established and crypto investors seek opportunities to outperform Bitcoin, and in part by fresh money flowing into crypto assets, supporting prices in the secondary market, as well as venture funding.
The current elusive altseason
The current bull cycle has been anomalous with altcoins continuing to underperform quite substantially since the November 2022 cycle bottom.
This is in part due to Bitcoin having unusually strong specific drivers in this cycle. The approval of the Bitcoin spot ETFs in the US is catalysing substantial demand for Bitcoin. Innovation on the Bitcoin network has been reinvigorated since the beginning of 2023, supporting the growth of the protocol and generating increased transaction fee revenues. The narrative around Bitcoin’s use as a safe haven asset has also accelerated with US presidential candidates pledging to build Bitcoin reserves.
At the same time, many otherwise successful projects and sectors are held back by a change in the distribution of new token launches. The currently favoured model of venture investment – sweat equity by founders and airdrops to incentivise early adoption – means that there is a lot of selling pressure early on from airdrop farmers, and a long tail of token unlocks brings dilution, as VC and founder stakes vest. Meanwhile public token sales – where investors are incentivised to hold the newly issued tokens – have declined in significance. This has created an unfavourable supply/demand dynamic in the market until the supply overhangs are worked through, and it has made it harder even for the tokens of very successful projects to rally.
However, market niches and tokens of projects with a compelling narrative and strong sustained user traction have performed extremely well even in the face of such supply issues.
The importance of discernment
The term altcoin is used to refer to the “rest of market” – which includes multiple market segments with their own drivers.
Some altcoins are the tokens of alternative blockchains (Solana, Avalanche, NEAR, etc.). The projects are simply competing with the leading blockchains for market share, often through innovation and through catalysing growth for the market as a whole by making new types of transactions and use cases possible. Their relative success depends on being able to bring genuine advances to the blockchain space and on being able to get developers and ecosystem projects on board.
The opportunity for projects and businesses that serve the crypto market (such as crypto exchanges) lies in benefiting from the growth of the market.
Meanwhile, decentralised applications are delivering on the opportunity of applying the decentralised ledger technology to a number of industries, and their success depends on the traction of the use cases they serve.
When the crypto market was less mature, “alt rallies” involved most altcoins. Discernment is far greater today, and an alt rally can be limited to certain sectors only. Similarly, some sectors (such as DEPIN recently) can perform extremely well even in absence of an “altseason”.
Summary
Ultimately, the greatest long-term opportunity in the crypto market lies in the multitude of potential use cases being realised, and most of this value will be delivered by altcoins. Meanwhile the growing political support for the crypto industry in the US is removing a lot of risk around altcoins, and if these developments continue and election promises are kept, this is likely to focus attention on the value in the rest of the market.
Read more about crypto assets from Sygnum here.
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