Gary Gensler’s resignation ignited the long-awaited altcoin outperformance. User adoption and the exact form and pace of crypto regulation will dictate whether the “alt season” will continue to be fuelled by fundamentals.
Bitcoin versus the broad crypto market index excluding Bitcoin
Source: CoinMarketCap, Sygnum Bank
Rational outperformance
From the beginning of the year up to Gary Gensler’s resignation, Bitcoin had generated a +133 percent return versus only +47 percent for the altcoin index.
This extraordinary underperformance was in part due to Bitcoin’s uniquely strong drivers, especially since the launch of the spot Bitcoin ETFs. Another important reason was the SEC’s insistence in multiple lawsuits that most crypto assets are securities in the traditional sense and the same regulatory requirements need to apply to them. Other lawsuits (such as charging Consensys for selling unregistered securities on behalf of liquid staking providers Lido and Rocket Pool) and notices of intended enforcement actions (such as the action against Uniswap) depressed certain niches of the market further.
It is, therefore, not surprising that it was specifically the resignation of SEC Chairman Gary Gensler that ignited the outperformance in altcoins. Since 21 November, altcoins have outperformed by 30 percent on average, and several have seen their token prices multiply – even certain mega caps such as Cardano or Ripple.
Regulatory changes
With the new pro-crypto SEC Chairman Paul Atkins and the composition of the SEC commissioners changing materially with the resignation of two Democrat commissioners, it is likely that the SEC’s approach to regulating crypto businesses will change substantially.
Additionally, it was reported that the new Trump administration intends to give the Commodity Futures Trading Commission (CFTC) a leading role in regulating crypto assets. Removing the risk of subjecting crypto projects to regulatory requirements that they cannot reasonably comply with or facing lawsuits provides a strong positive driver for the altcoin sector.
Additionally, the personnel changes are likely to mean that the ongoing lawsuits and investigations may be dropped, and the path may open to the issuance of further crypto ETFs.
Best-case scenario
If crypto regulation allows projects to pass value to tokenholders without triggering an unreasonable regulatory requirements, this can ignite a tremendous revival in innovation and value creation in the alt sector. The mechanisms of fee switches, token burning and providing a non-inflationary staking yield are already in place, but most projects do not tend to implement them for fear of a regulatory crackdown.
If tokens are tethered to real economic value, the market is quick to recognise and reward this. Projects proposing to make such changes typically see a steep rally in their token prices. If regulation allowed this to become a widespread trend, this could bring a lot of capital to decentralised applications and the infrastructure they build on.
If the regulatory changes we see in the US deliver this outcome, then recent altcoin outperformance can continue and culminate in a broad-based, fundamentally driven alt season.
Alternative scenario
If regulation remains unclear in this regard, altcoins can still continue to rally, however, the price moves would be mostly unconnected to economic value creation, with the tokens trading like de facto memecoins. This could lead to a bubble that would, at some point, inevitably burst.
We have seen this in previous bull cycles – after the ICO bubble burst in 2017, the vast majority of those tokens lost almost all their value. Similarly, the Ponzi-like economics of play-to-earn games meant that the token prices of these protocols crashed once the market peaked, even when the underlying projects continued to function.
For example, Axie Infinity saw its token price fall from USD 160 to USD 4, and it trades around USD 9 currently, although the game continues to attract players and still has a dedicated following. Contrast this, for example, with decentralised lending protocol Aave, which is considering the activation of a fee switch. The Aave token is trading 30 percent below its all-time high – a discount justified by the headwinds the altcoin sector has faced – but it has largely retained its value, unlike Axie Infinity.
Memecoins
In an environment where altcoins are disconnected from value creation and traded like memecoins, the actual memecoins tend to outperform.
Indeed, year-to-date, memecoins are by far the best-performing sector of the crypto market. If regulatory changes allowing real token value creation are slow to materialise, the alt season is likely to remain primarily a memecoin season, and very likely a memecoin bubble.
Impediments to a broad-based alt season
Beyond the speed and clarity of regulation as it pertains to altcoins, there are a few headwinds for the alt sector currently.
Bitcoin’s strong drivers, with the possibility of central bank Bitcoin reserves and allocations by institutional investors as well as corporate treasuries, provide a tough challenge for the rest of the market to outperform.
We will also see less rotation from Bitcoin to altcoins than in other cycles because new investors who bought the Bitcoin ETFs did so because this allowed them to gain exposure without the operational set-up to trade and settle spot crypto assets. These investors will not be selling their Bitcoin ETFs to buy altcoins.
But maybe most important of all, user traction has been lacklustre for most decentralised applications – with only a small number of notable exceptions. Without significant user adoption, even if projects are able to pass revenues onto tokenholders, if there is not much revenue to pass on, the token price will either trade on the long-term hope of “widespread adoption one day” or will continue to trade as a de facto memecoin.
Summary
Altcoin outperformance since Gary Gensler’s resignation has been a rational reaction to the reduced regulatory risk. As a more favourable regulatory environment is confirmed, there is a more fundamentally driven upside to the alt sector, and in a best-case regulatory scenario, we could see a broad revival of innovation and growth across crypto use cases and the infrastructure they are built on. However, the altcoin segment also faces headwinds currently, and without improving fundamentals of user adoption and token value creation, there is a risk of a memecoin-driven altcoin bubble.
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