What is the future of altcoins? Will it get worse?

Author: Hyphin, On Chain Times; Compiler: Wuzhu, Golden Finance

While mainstream cryptocurrencies and the U.S. stock market continue to show favorable price action, confidence in altcoins appears to be at an unusually low level. The expectations instilled by previous cycles have left many disappointed and incredulous, while their portfolio returns have stagnated in an upward trend.

Current Situation

Sentiment in this space tends to be fickle, as people often exaggerate, especially when they are overexposed. Biases can change at will, making sentiment on social media an unreliable indicator for forming an accurate market outlook. What we can do, however, is plot some relevant data on a chart and analyze it to determine just how dire the situation really is.

Indices and aggregate charts that track various global indicators give us a broad view of the entire market, helping to determine where most of the value is and how it is moving.

The total cryptocurrency market capitalization has grown significantly over the past year and a half with surprisingly little volatility. Despite Bitcoin’s record highs, it has yet to break through the levels seen during the 2021 frenzy, largely due to the inability of altcoins to keep up with Bitcoin’s growth. The lower-than-expected capital flows to more speculative assets caught many off guard.

This phenomenon can be better illustrated by directly plotting Bitcoin against the altcoin market (excluding Ethereum), embracing its continued appreciation.

Needless to say, this time around, Bitcoin stole the show, coming out on top by gaining more and more market share during its ascent. Basically leaving altcoins in the dust. The once lucrative game of catch-up between Bitcoin and the rest of the market has now become a pipe dream. Any attempt to kick-start a proper market alt season has been hampered by a lack of liquidity.

Even though Ethereum has been mocked for its lackluster price action, it has still managed to stay ahead of the curve. Speculators who have positioned themselves in on-chain ecosystem tokens, aside from memecoin or anything denominated in stablecoins, have been having a good time in purgatory. Our sincerest tribute goes out to those who have fallen in love with the ETH beta kid.

Indicators widely used to find favorable conditions to enter or exit alternative markets have been sending worrying signals, suggesting that the prevailing view on market dynamics may not be applicable to the current situation.

Correlations between the main asset and other assets have proven to be very useful in determining the current conditions of the market. By incorporating an oscillator that tracks the difference between the two (blue line), participation levels can be configured and subsequently used for convergence. Low oscillation values ​​coupled with rising Bitcoin prices are often seen as a reason to buy, assuming that altcoins are undervalued and will eventually remain undervalued. Recent data shows that bullish periods for altcoins have gradually become shorter and weaker, incentivizing short-term investments rather than uncertain longer timeframe investments.

Despite the high upside potential offered by many seemingly promising tokens, they still struggle to deliver exceptional returns.

This is reflected by the lackluster performance of the top 250 assets compared to the two largest assets, which have been somewhat overlooked by many players in the space due to their astronomical valuations. Further weighing down sentiment.

Needle in a haystack

It is clear that things have changed over time and identifying trends and narratives has become more important than ever in order to outperform the index. The days of everything rising at once appear to be over. Fragmented liquidity and falling trading volumes have concentrated most of the significant gains into a handful of sectors. While general metrics suggest that altcoins as a collective with marginal value additions are struggling, they do mask the disparate growth of individual asset groups.

Cryptocurrency Class Growth

Market value growth of individual asset classes relative to various other currencies since the market bottom.

A strict look at the market capitalization changes of the various baskets since the start of the rally shows that most mature categories have fallen below the benchmark. On the other hand, emerging regions with a lot of opportunity, appeal, and new developments have performed very well. It is important to note that outliers can exist in any sector, and growth within a curated group is only a vague representation of the performance of the covered assets.

To review what has happened so far and determine who was right and who was wrong, let’s highlight a few relevant categories and measure the price returns of their most valuable assets.

Price return calculation method:

To account for recent launches that have risen to the top of their category, starting prices are either queried from November 21, 2022, or from the first entry on CoinGecko. Current prices are queried at the time of writing (June 18, 2024).

Price_return_% = ((Current Price - Starting Price) / Starting Price) * 100

Memecoins

Memecoins were undoubtedly the theme of this round. Last year, memecoins produced more overnight fortunes than lotteries, while also taking away enough wealth to rival the taxman.

Memecoins Total valuation percentage changes were not as large as one might expect, as coins like Dogecoin and Shiba Inu, which account for nearly half of the market, saw little upside. Aside from a few very successful tokens on Ethereum, the bulk of the meme activity has occurred on Solana and, more recently, Base. The highest returns and new top 10 entrants (3) came from Solana, with percentages exceeding five figures twice.

DeFi

Revenues. Fundamentals. The future of finance. Protocol usage, transaction volume, and total value locked metrics are all rising as more people get involved in blockchain. Does all this mean new expansion? Well, not exactly.

Leaving innovation and product-market fit aside, price returns for DeFi (excluding 1.0) tokens have been simply horrible, as all projects except Pendle and The Graph have tanked. The liquidity staking market has seen massive growth and adoption over the past few years, but governance tokens representing liquidity wrappers have not. Tokens associated with decentralized exchanges have suffered the worst price volatility of all tokens, with only Jupiter remaining in the green.

While the above chart sets a worrying precedent for the space, perhaps the granddaddy of the industry, DeFi 1.0, has managed to exceed expectations.

Regardless of their high valuations, high yields, and high utilization, traditional protocols have proven to be a poor investment cycle unless a yield strategy is adopted to offset depreciation. Due to mediocre performance, a recurring theme of DeFi protocols is the lack of use cases for their tokens beyond liquidity mining. Fee switching may be a saving grace as it creates significant buying pressure on tokens by providing users with actual yields rather than diluting their holdings.

L1s

Layer 1 blockchains are by far the most popular and heavily traded category among speculators, representing the sector and historically showing solid price action, led by Bitcoin and Ethereum. Advances in the space have spawned millions of alternatives vying for market dominance. Their success is closely tied to their ability to foster a thriving ecosystem that attracts skilled builders and draws in a large user base that constantly interacts with the applications. In some cases, technical specs alone are enough to establish a presence.

Many of the entries on the list have managed to generate multiples, with only three of them surpassing the category leaders. Solana has been hailed as the Layer 1 play of the cycle, not just for its returns, having risen from the bottom to quickly become one of the most used chains on the market and the de facto memecoin hub. Kaspa has outperformed Solana despite its lack of mainstream attention and relatively low trading volume, which has kept it out of the spotlight.

L2s

To address issues of scalability and expensive transaction fees, roll-ups have cemented themselves as an integral part of the on-chain ecosystem.

Unlike the base layers they leverage, L2s have seen mediocre returns, while low-volume, high-valuation venture chains like Starknet and Arbitrum have fallen into deep losses. Any significant value growth has been shown by those associated with new concepts related to zero knowledge and Bitcoin infrastructure.

Conclusion

After facing harsh market realities and receiving liquidation emails, one cannot be blamed for thinking that altcoins are a thing of the past. It is clear that it has become increasingly difficult to win on Bitcoin and Ethereum at this moment without following some kind of trend. It is impossible to take advantage of every trend unless you end up online or influential. The negative sentiment brought about by these prices suggests the need to rebalance the portfolio and consider risk. The future of the altcoin market is uncertain, but it is hard to imagine it getting any worse.