Altcoins have severely underperformed bitcoin year-to-date but are they setting up for period of outperformance?
The overwhelming theme for the cryptocurrency markets since the start of Q2 2019 has been bitcoin recording extraordinary appreciation while altcoins largely lagged. This is an entirely different theme than the one observed for the majority of 2018. For long periods in 2018, altcoins outperformed bitcoin during periods of overall cryptocurrency market increases and underperformed during periods of overall market declines.
The general underperformance of altcoins compared to bitcoin is evident when the percentage performance of the altcoin market cap in terms of USD is compared with the percentage performance of the Bitcoin market cap. The Bitcoin market cap has increased 138% year-to-date while the altcoin market cap has increased only 43% over the same period. Only a small number of altcoins have managed to outperform the market leader. From January 1st to June 30th, just twelve altcoins outperformed bitcoin. The three largest of these were Chainlink, Ren, and Binance.
Why has Bitcoin Outperformed?
The strong price performance of bitcoin has been closely tied with an increasingly gloomy economic outlook. Turbulent economic events such as the trade war between the US and China escalating have at times directly corresponded with increases in the price of bitcoin. When the Chinese Renminbi devalued against the US dollar, the price of bitcoin appreciated at the same time.
The narrative of Bitcoin as a digital gold and a safe haven supports bitcoin’s outperformance in times of economic turbulence. Altcoins lack such a narrative and are still considered wildly speculative by institutional investors. Bitcoin has continued to grow confidence among institutional investors with recent evidence of more these investors in the Bitcoin market. There have also been a greater number of markets being built around Bitcoin with Bakkt scheduled to launch the first physically delivered Bitcoin futures contracts. All of these events add further credibility to the Bitcoin market while altcoin markets transition into an increasingly precarious position among institutions and regulators. Exchanges have actively delisted altcoins this year as the regulatory environment around such assets remains uncertain.
Is Altcoin Season Approaching?
Despite the precarious position altcoin markets are in, some analysts are assigning an increased probability of outperformance of altcoins in the near-term given recent technical patterns which have emerged. CoinDesk Markets are monitoring a falling wedge pattern which the altcoin market cap currently trades in. After recently testing the upper bounds of the wedge, the altcoin market cap failed to overcome selling pressure and declined in value. However, repeated tests of resistance levels serve to reduce the seller liquidity and increase the odds that values can trade above.
On-chain analyst Willy Woo pointed out that the altcoin to Bitcoin market cap ratio is approaching its longer-term trendline. Woo noted that “alts may be heading into a region of support”. However, given the rapidly changing nature of the cryptocurrency market and its interplay with states and institutional entities, there is no guarantee that the relationship the altcoin/BTC ratio has with this trendline will continue to hold. Given the trend towards Bitcoin as a market increasing in legitimacy combined with altcoins becoming increasingly questionable, we would argue that the trendline relationship is bound to break down eventually and has a higher than even probability of breaking down on this occasion.
Diminished volumes in altcoin trading have also been reflective of decreased confidence in the altcoins market. Trading volume in the largest altcoin ether recorded its second-lowest month of 2019 in August. Trading volume has been steeply declining since May after a brief spike in March and April.
Trending Towards Zero?
The dominance percentage of bitcoin continues to increase as a result of the continued outperformance of bitcoin. It has recently reached 2019 highs at 72.55%. With very few altcoins managing to survive 4-year trading cycles, some would argue that altcoins are trending towards zero and Bitcoin is the only which staying power in the market. Blockstream CSO Samson Mow believes that Bitcoin dominance is a flawed metric to use that it implies altcoins with unlimited supply have value.
Although there are arguments which can be made for another altcoin season, the evidence for the counter side that altcoins will continue to underperform bitcoin is far more robust. The economic turbulence taking place in the macroeconomic environment has strengthened the digital gold and safe haven argument tied to Bitcoin. However, altcoins have failed to find such a strong narrative and technicals show altcoins continuing to underperform market leader bitcoin. Although altcoins may be approaching a region of support, our analysis leads us to assign low odds to the scenario of altcoins entering a period of outperformance which lasts longer than a few days.