The fall of Bitcoin’s dominance & the rise of altcoins
Bitcoin falls, Ethereum rises, and altcoins become less "alt"
Happy Friday and happy CMB-newsletter-release day!
This week, I decided to take a macro-level view of Bitcoin and the crypto market generally. We look at Bitcoin losing its dominance, Ethereum getting a hold on the market, and altcoins becoming a serious crypto force.
To talk about those issues, I have to occasionally use some technical language (sorry). For this reason, I started a new series on CMB which reviews some of the main concepts and ideas around blockchain technology in (hopefully) an easy-to-understand way. I recommend checking out the first of the series, “Crypto crash course: blockchain, smart contracts, dapps, and more,” before continuing.
With that out of the way: sit back, enjoy, and see you next Friday.
-Katja
The fall of Bitcoin’s dominance & the rise of altcoins
Bitcoin’s decline
Bitcoin recently celebrated its 13th birthday. From its inception until the 2017 crypto bubble, Bitcoin dominated the crypto market. It then had a tumultuous two years battling other emerging cryptos, until it plateaued in July 2019, accounting for 60-70% of the total crypto asset market.
In early 2021, Bitcoin began to face off against Ethereum, which gained momentum due to a number of developments (discussed later). Ethereum’s share of the market increased to 20%, while Bitcoin’s dropped to 40%.
Rise of Ethereum
Although different blockchains operate on the same principles of security and decentralization, they have different priorities for what they optimize. Bitcoin focuses on anti-seizure of assets, while Ethereum focuses on programmability.
Because of this difference, Ethereum presented several advantages over Bitcoin, which led to Ethereum’s outperformance of Bitcoin by 400% over 2021.
These advantages can be summed up into two main categories: Layer-1 protocol upgrades and expansion of Layer-2 applications.
Ethereum prepares to transition to a Proof-of-Stake (PoS) consensus mechanism, as part of Ethereum 2.0 (recently rebranded to consensus layer) rollout. Switching to PoS would allow Ethereum to increase transaction speed and lower costs.
In preparation for this rollout, Ethereum has released certain protocol upgrades, with the Berlin and London Hard Fork being among the most prominent. Without getting into the weeds, these two upgrades have already enhanced the efficiency of the blockchain, which the consensus layer will further solidify.
The programmability of Ethereum comes from its use of smart contracts that expanded Ethereum’s reach by powering decentralized applications (DApps), especially as they pertain to decentralized finance (DeFi) and NFTs. Widening the reach of Ethereum has fueled the creator economy in the Ethereum ecosystem, attracting a new user base.
One application of such Layer-2 protocols brought about a boom of decentralized autonomous organizations (DAOs) which are self-governing communities around shared interests. An example of such an organization is The LAO, which functions as a venture capital firm for DeFi projects on the Ethereum blockchain.
Due to these advantages, some people believe Ethereum and Bitcoin will eventually flip in their market dominance, with Ethereum rising to the top and Bitcoin falling to an equal level with altcoins. Others think Bitcoin will hold its own at the top. Before becoming too entrenched in this relationship, let's not forget other cryptocurrencies that continue fighting for a seat at the table.
Challenged by altcoins
Over the past year, the NFT craze has made Ethereum’s gas-fees soar, pushing people to alternative Layer-1s. These blockchains demonstrated fast-growing networks that drove the price performance of their native tokens (collectively referred to as altcoins).
Just as an example, take one of Ethereum’s main competitors: Binance Smart Chain (with BNB as the native currency). Binance Smart Chain implemented a PoS protocol while implementing smart contracts, mainly as a way to get in on DeFi and NFTs without the difficulties (high cost and low speed) posed by Ethereum.
BNB has seen growth of 1344% in 2021, making it the best performer of the three biggest cryptocurrencies.
These alternative smart contract platforms will most likely continue to steal Ethereum’s market share this year, especially if Ethereum’s merger continues to get pushed back.
However, the crypto market will not support the constant battle among Bitcoin, Ethereum, and alt-Layer 1s. As Pascal Gauthier, CEO of crypto wallet firm Ledger, stated, “Last year they (cryptocurrencies) were projects coming into the light; this year; they have to deliver in terms of applications running on top of these protocols.”
This year, many projects will likely fail to deliver, while others live up to their unique value propositions.
In the background of all this, macro economic trends have shaken up the entire crypto market. You have probably seen news stories over the past week discussing the direction the economy (and crypto) may be heading.
Future of the crypto landscape
As discussed in a previous article, Bitcoin has the ability to behave both like a risk-on asset and (decreasingly) as an inflation-hedge.
Because it behaves like a risky asset, it tends to follow the volatility index VIX. Whenever the VIX spikes, Bitcoin experiences a period of sell-offs, as investors redirect their money to more low-risk assets like Treasury bills or bonds.
Over the past five days, the VIX reached a high of 37.98 and crypto experienced massive sell-offs. This is due to the continued uneasiness around the Fed and US government in general, especially after the Federal Open Market’s Committee (FOMC) released its latest decisions. On top of this, the White House is set to prepare a crypto executive order that would treat crypto as a matter of national security.
As long as fear and uncertainty continue to remain high, the crypto market will suffer. This will most likely be the case for the next several months and could extend to over a year.
Even though crypto may have just entered a bear market, it will come back. With the ever-increasing institutional and societal adoption of crypto and blockchain, this technology will not go away. At these times, it is important to stop checking your portfolios, look at the bigger picture, and believe in the system.
Crypto news of the week
Here is the latest crypto excitement from around the world...
“Apple stock jumps after CEO reveals it's investing in the Metaverse”
“YouTube’s CEO hints at NFT integration, while its head of gaming leaves for Polygon”
“Texas Governor Greg Abbott is inviting Bitcoin miners to stabilize electrical grid”
“Crypto leaders launch political action committee to back congressional candidates”
“Amex CEO hints at exploring ways to allow credit card holders to redeem points for crypto”
“Putin backs crypto mining despite Bank of Russia’s hard line”
“Binance partners with Gulf Energy to launch crypto exchange in Thailand”
“NFL offers Super Bowl LVI ticket NFTs to fans”
“The Beatles memorabilia put on sale as NFTs by Julian Lennon”
“Belgian MP becomes first European politician to accept salary in Bitcoin”