A recent report from CoinMetrics suggests that when a new altseason starts it will play out in a way that is vastly different from the market of 2017-2018.
According to the authors of the report, the arrival of institutional investors and their interest in Bitcoin (BTC) and Ether (ETH) has fundamentally shifted the cryptocurrency market landscape. Tokens with real world utility, Layer 2 technology or attractive staking ecosystems will outperform the large cap tokens from pre-2017.
Bitcoin and Ethereum dominate but L2 tokens will catch up
Institutional inflows firmly established Bitcoin and Ethereum as the chosen Layer 1 (L1) blockchains and this is reflected in the price action of the market since Dec. 1, 2020. As shown on the chart below, the only L1 coins to outperform BTC and Ether during that period were Cardano (ADA), Dogecoin (DOGE) and Decred (DCR).Altcoin returns 12/1/20 – 11/17/21. Source: Coin Metrics
Competitor L1 blockchains from previous runs, such as Litecoin (LTC) and Bitcoin Cash (BCH), have underperformed compared to BTC and both continue to see their share of the marketcap decrease as the conversation shifts payments capacity to store of value performance.Price vs. Marketcap dominance (LTC, BCH). Source: TheTIE
So called ‘Ethereum Killers’ like Tron (TRX) and EOS have failed to live up to their lofty claims and are plagued with concerns regarding block producer collusion and centralized networks.
Polkadot is the main stand-out L1 blockchain that has emerged over the past few months and what sets it apart is the team’s decision to facilitate the overall growth and interoperability of the blockchain ecosystem rather than dominate it. This explains why the altcoin has rallied 85% in 2021.
Today’s successful projects offer staking and DeFi integration
Here is where this altseason begins to diverge from the last. Staking, governance tokens, and the integration of DeFi are the primary drivers in this market as users want more involvement in the growth and direction of each project.
Decred (DCR) is a perfect example of this emerging trend. Created in the image of Bitcoin with a maximum supply of 21 million tokens, the network combines PoW with PoS to allow all members of the community the opportunity to get involved and earn rewards.
A built-in governance mechanism gives token holders a direct say in the future of the project, and the release of the Decred Decentralized Exchange (DCRDEX) on Oct. 21, 2020 triggered the DCR price to rally from 11.68 to a new high of $67.80 on Jan. 8.
Cardano is making the case for its value as an L1 blockchain through the implementation of staking and discussions from creator Charles Hoskinson about bringing DeFi to developing countries once smart contract functionality is fully integrated. These developments helped propel a 100% increase in the price of ADA since the beginning of 2020.
DeFi governance tokens give investors a voice
The DeFi boom has been incredibly attractive to investors who are looking for a more hands on approach to interacting with emerging blockchain projects.
The sector is a clear driving force in the market and since Dec.1 Uniswap (UNI), AAVE, Synthetix (SNX), MakerDAO (MKR), SushiSwap (SUSHI), and Curve (CRV) have all outperformed Ether and BTC. Note that they all include staking and governance functionality.DeFi Returns from 12/1/20 – 1/17/21. Source: Coin Metrics
Perhaps the 2018 bear market that followed the euphoric 2016 to 2017 rally has created a more discerning investor who wants more say in the development of the project rather than buying into the detail lacking whitepapers and lofty promises of anonymous developers.Total value locked in DeFi. Source: DeFi Pulse
As can be seen in the chart above, the total value locked in DeFi continues to grow and recently hit an all-time high of $25 billion, a figure larger than the market cap of many of the top projects combined.
Cryptocurrencies that offer real world use cases that meet the sector’s demands and the ability to govern project decisions have emerged as the most desirable features for today’s retail investor.
Institutions may have chosen Bitcoin and Ether as their preferred investments but the battle for Layer 2 dominance between tokens that function as Ethereum alternatives is clearly where retail investors are placing their attention and this is what will drive the next altseason.
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