Time to Move into Altcoins?
Bitcoin was the best cryptocurrency this year among the largest coins, presumably reflecting a safe-haven bid. Will this safe-haven flow become distributed across a broader crypto universe and not only Bitcoin? Which altcoins may benefit the most?
Bitcoin Outperforms
Bitcoin has vastly outperformed most other coins this year. The safe haven bid arising from the banking crisis was seemingly concentrated in the largest and presumably the most reliable cryptocurrency. Bitcoin dominance on April 11 reached the highest level since July 2021 (although on a long-term chart, Bitcoin dominance would still look relatively low).
Bitcoin dominance
There might be a shift from stablecoins to Bitcoin. Binance USD suffered from regulatory issues, being prohibited to increase its available supply. USDC temporarily lost the peg vs the dollar, shattering its status as the safest stablecoin. USDT managed to solidify its status as the largest stablecoin, but its market cap gains were smaller than BUSD and USDC losses. The total supply of these three largest stablecoins declined by about $10 billion this year, but that was just a continuation of a trend arising in April 2022. After reaching almost a $150 billion market cap in April 2022, the three stablecoins steadily lost assets and never recovered from the TerraUSD collapse of May 2022.
Supply of USDT, USDC, and BUSD
Among the 10 largest cryptocurrencies by market cap (excluding stablecoins), only Matic and Litecoin managed to outperform Bitcoin in the 1-year time frame. Ethereum was the third-best coin, losing about 6% vs. Bitcoin. XRP/BTC was down by 9%, and DOGE/BTC declined by 12%. Other top-10 coins dropped by more than a third in BTC terms.
Altcoins 1-year performance vs. Bitcoin
Year-to-date Bitcoin rose more than all other top-10 coins except deeply discounted Solana and Avalanche, which bounced after a last-year big drop.
A Turning Point?
Bitcoin's big outperformance raises the question of whether Bitcoin becomes expensive compared with other coins. Unfortunately, it’s easier to ask than answer since there are no fundamentals to estimate an intrinsic value of a cryptocurrency. When Apple outperforms a broader stock market, it’s possible to compare price multiples, expected growth rates, and the risk associated with this growth. These estimates are always imperfect, but at least there is a general framework providing the basis for comparison. In crypto, no such framework exists.
Intuitively, Bitcoin is probably not the only successful crypto project, so this-year large flows which came mostly in Bitcoin should become distributed within a broader crypto universe. If my intuition is right, then the Shanghai update may provide a convenient turning point for ETH/BTC, removing both possible technical issues and fears of large-scale staked coin outflows. I think that other major cryptocurrencies vs. Bitcoin may loosely follow ETH/BTC in this case.
The Shanghai update, which allows the withdrawal of staked coins, was very smooth, bolstering the Ethereum price. The chart indeed looks like Ethereum has bottomed out vs. Bitcoin, as Ethereum fell to a year-to-date low vs. Bitcoin just before the update but sharply rose thereafter.
Year-to-date performance of ETH/BTC
What to Choose?
The idea of diversifying into altcoins obviously needs a specification of what altcoins to choose. Unlike stocks, a broad index of all crypto is both difficult to replicate (because there are no such index funds) and less attractive for investments (because there are too many altcoins offering little value and no diversification benefits).
Investors having no specific expertise in altcoins may just add Ethereum to Bitcoin holdings. As the second-largest coin with a completely different tech nature (proof of stake rather than proof of work), Ethereum seems to be an excellent diversifier to Bitcoin.
Other altcoins are much riskier than Ethereum. In this space, I would prefer last-year leaders Litecoin and Polygon (Matic). My view is largely based on the stock market analogy of betting on the strongest companies. Litecoin halving is expected in August this year, which may support its price. Polygon has an obvious value proposition, as wider use of Ethereum should increase demand for Matic providing cheap Ethereum transfers. Also, technicians may like the Matic chart.
MATIC/USD (candles) and 50-day moving average (blue)
Conclusion
This-year large flows, which came mostly in Bitcoin, may become distributed within a broader crypto universe, supporting altcoins. The Shanghai update seems to be a turning point for ETH/BTC and likely for most of the other major altcoins too.
Investors having no specific expertise in altcoins may just add Ethereum to Bitcoin holdings. As the second-largest coin with a completely different tech nature, Ethereum seems to be a very good diversifier to Bitcoin. Other altcoins are much riskier than Ethereum, and in this space, I would prefer last-year leaders Litecoin and Polygon (Matic).
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.
