With over 5,000 cryptocurrencies in circulation, Bitcoin has continued to maintain superior status since inception. Investors have grown on Bitcoin due to its “first mover advantage” and decentralized infrastructure. As of recent, studies show that altcoins are growing in popularity. As we potentially enter a new bull market, why could altcoins put pressure on Bitcoin?
In 2009, the Bitcoin network surfaced and it paved the way for altcoins. In terms of alternative assets, thousands of “altcoins” promised they could take the Bitcoin infrastructure and monetize it numerous ways such as higher security and faster transaction speeds. Unfortunately, this fueled “initial coin offerings” which were glorified nightmares. Many ICO’s were constructed to funnel in investor money without giving up “equity ownership.” The problem here was that many ICO’s ended up being scams that had no material business behind them. According to a report, more than 70% of ICOs in 2018 lost all their value. The amount investors sunk into ICOs in 2018 surpassed $14 billion.
The SEC and other regulators started cracking down on initial coin offerings, which essentially decimated this funding strategy. With this being said, many other funding mechanisms evolved that helped the altcoin market continue to grow in circulation. Some of these methods include security token offerings, interactive initial coin offerings, SAFT, airdrops and more.
It’s also important to note that many altcoins evolved without investor money as well. Some projects have used this to their advantage in terms of marketing. Despite the ICO markets creating negative sentiment in the space a couple years ago, altcoins have continued to surge in outstanding projects. We can take a look at the graph below to see the rapid growth over the years based on Coinmarketcap data. Since 2015, the number of cryptocurrencies outstanding has surged by +1,019%.
Bitcoin Impact ( Dominance )
Before the rapid growth outlined above, Bitcoins market dominance was right around 88% in 2015, meaning its value made up 88% of the cryptocurrency markets. Bitcoins current market dominance hovers around 67% as of 2020. With this being said, Bitcoins dominance levels have fallen ~24% since 2015. With Bitcoin still being the most liquid digital asset, that comes with a fundamental cost. When you have an environment where altcoins continue to surface, it becomes very difficult for Bitcoin to gain market share. From a liquidity standpoint, many people that want to purchase these cheap altcoins are tapping Bitcoin first for liquidity. What this means is they will simply onboard Bitcoin with the intention of converting it to an altcoin of their choice. The chart below shows the decline in Bitcoin dominance levels since 2015.
With cryptocurrency investors looking for another 2017-like rally, many have been allocating capital to altcoins opposed to Bitcoin. Despite Bitcoin having the strongest track record, investors are diversifying into altcoins at a rapid pace. The most recent study came from Coinbase cryptocurrency exchange. According to a blog post by Coinbase :
“ The data bears this out. Among customers with at least 5 purchases, 60% start with Bitcoin but just 24% stick exclusively to Bitcoin. In total, over 75% eventually buy other assets.”
The study concludes that only 24% of users that start with Bitcoin end with Bitcoin. It further supports our theory above, regarding Bitcoin being used for its liquidity. This study was quite interesting, and probably the opposite of what many people thought was happening beneath the surface.
Why Are Investors Targeting Altcoins?
There seems to be a handful of reasons for this behavior. Below we take a look at the obvious catalysts.
Similar to traditional portfolio management, investors like to have a mix of assets. There’s many Bitcoin “maximalists” out there that would argue against this, but as more clarity and use cases surface around altcoins, investors are interested in the opportunity. With Bitcoin transaction count growth staying stable the last 5 years, many believe that “store of value” is the ultimate driver behind Bitcoin. Crypto investors are looking for other altcoins that focus on various use cases.
It would be interesting for Coinbase to look at customer behavior. It's assumed that many people purchasing altcoins in the last year were Bitcoin “peak buyers.” There were investors that bought Bitcoin at the peak around $20,000 and then saw drastic losses. With investors adding altcoins to their portfolio, this makes them believe they can recapture losses quicker if a specific altcoins has a Bitcoin-like run.
Believe it or not, many new investors that enter crypto markets have no idea that you can buy Bitcoin in fractions. Most look at the price of Bitcoin and it draws them away. This is similar to a traditional stock like Amazon. Retail investors are forced to buy packaged products ( mutual funds, ETFs ) to get Amazon exposure. The average retail investor can’t afford to purchase one share of Amazon. On the flip side, the average investor that enters the space may be turned off by the price of Bitcoin, especially if they find out they will only own a small fraction of a Bitcoin for $500. From a behavioral finance perspective, a retail investor feels different if they receive 8,300 of stellar for $500 compared to .05 Bitcoin.
With Bitcoin being one of the best performing asset classes in the last decade, investors are programmed to look for the “next bitcoin.” Unfortunately this hasn’t panned out, with investors losing a lot of money on various altcoins. On the flip side, many altcoins have outperformed Bitcoin recently. The figure below shows more interest in altcoins like Chainlink and Tezos. Tezos for example has experienced higher ROI ( return on investment ) the last 1 year compared to Bitcoin. Investors that allocated to Tezos benefited drastically, having a ROI at +48% compared to Bitcoin +18.3%
What To Look For ?
The growing circulation of cryptos continues to surge. With this being said, it’s assumed that altcoins will continue to attract interest until Bitcoin makes a transformative move. A transformative move could be anything that puts Bitcoin in the hands of the masses. Despite the Bitcoin ETF being a disaster, it’s only a matter of time until one is introduced. In an environment like that, it would be assumed that Bitcoin could take significant market share from altcoins. Until something like this occurs, it's evident that investors ( especially new users ) are going to flock to the cheaper altcoins.
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