Bitcoin recently touched $14,000 in the past few days and other cryptocurrencies (ie. altcoins) have lost ground against it. Many Bitcoin maximalists have started to chatter about how Bitcoin will start to decouple from altcoins and suggest Bitcoin will leave altcoins in the dust bin of history. Even if in the long run that is a possibility, altcoins are likely to be in a very short term downturn and very well may lead Bitcoin in the next bull market.
We've Seen This Before
Bitcoin and altcoins generally move together against other asset classes like stocks and bonds, but altcoins also oscillate around Bitcoin so there are some weeks and months were one outperforms the other. Over many years only a handful of altcoins end up keeping up with Bitcoin. Litecoin is one example. Others have come and gone and there are currently thousands of coins. Crypto twitter influencer Willy Woo came up with the insightful terms oscillators and degenerators. The vast majority of altcoins are degenerators and don’t keep up with Bitcoin and many fade away into obscurity. However the death of altcoins becomes an increasingly common topic when Bitcoin outperforms even in the short term.
One way to follow the trends between altcoins and Bitcoin is to look at the Bitcoin Dominance Index that shows what percentage Bitcoin comprises out of the total cryptocurrency market value. In the chart below we see that Bitcoin for the most part was the only game in town up until about 2013 when Bitcoin’s dominance gradually dipped below 90% after the arrival of more altcoins such as Litecoin and Ripple. The biggest altcoin Ethereum led the ICO boom and even started to challenge Bitcoin’s top spot. At the peak of Ethereum prices in June 2017, ETH represented 31% of the total cryptocurrency market capitalization compared to 38% for Bitcoin. At that time Ethereum advocates even promoted the idea Ethereum would eventually overtake Bitcoin in what was being called a ‘Flippening.’
In the chart above the orange arrows indicate a trend when Bitcoin outperformed altcoins and the blue arrows indicate when altcoins outperformed. We can see a current trend favoring Bitcoin. Could that be setting up a major altcoin trend at the beginning of the year similar to the beginning of 2017?
Bitcoin vs. Altcoin Fundamentals
Bitcoin is the bellweather asset. It is as good as digital gold. Its likelihood of surviving is exponentially greater than other altcoins. However there are fundamental reasons why altcoins will persist and oftentimes have more upside potential than Bitcoin.
The first reason is that Bitcoin holders will generally want to diversify. People who have concentrated wealth in Bitcoin generally want to diversify their risk so most would consider putting at least 5/10/20% of their portfolio in other assets. Some of those assets could be non-crypto assets such as real estate or cash, but a more natural diversification is other cryptocurrencies. Before 2017 there were not a lot of stablecoins to park assets. However the most popular US dollar stablecoin Tether has ballooned from about $1 billion in supply in 2018 to over $16 billion today. Therefore, all Bitcoin investors can currently hedge up to about 5% of their Bitcoin wealth in Tether dollars. Altcoins represent another category for diversification. Bitcoin whales who have amassed incredible wealth may generally prefer to invest in blockchain infrastructure for a new digital future than just sit idly on their newfound wealth, even if altcoins are much more speculative.
The second reason why altcoins will persist is that many are fundamentally different than Bitcoin. Altcoins are not all in the money category. They represent another layer of infrastructure and many of these platforms such as Ethereum, EOS, Polkadot, Cosmos, Avalanche are more analogous to alternative stock or equity organizations rather than digital gold or money. Other systems such as Filecoin, Siacoin, Storj are storage platforms. There are thousands of other applications using blockchain technology. Most are experimental and won’t survive, but in the short term many of these speculative asset can gain traction and have potential. During a bull market, quality may not be as important as speculative potential. In the long term quality will be the only thing that matters.
The third reason in favor of altcoins is because of human nature and psychology. Most people don’t understand the fundamentals of Bitcoin so they will always look for the next big thing. People will think they already missed out on most of Bitcoin’s potential price appreciation so they’ll be more excited about investing in a newer system with fancier features. Institutional investors who see Bitcoin as digital gold will probably be more conservative and speculate less than retail investors, but even institutions will diversify into altcoins. Over the long run the larger institutions that provide massive infusions of capital into Bitcoin will likely help Bitcoin maintain a greater lead against altcoins, but the spillover to altcoins will still happen to some degree. Institutions are not immune to manias.
While there are fundamental reasons why Bitcoin may be far superior than most altcoins, investors will naturally want to diversify and speculate so significant investment into altcoins will likely persist. Bitcoin’s dominance will ebb and flow and people will continue the chatter about how either altcoins will be dead or on the other extreme how Bitcoin will lose its dominant position. Neither is likely to be true, but it may take more than a decade before we start to see a consolidation into the handful of cryptocurrency platforms that will be the foundation of our financial future.