The Bitcoin-Altcoin relationship: A reversion of altcoin dynamics

The following is a guest post from Shane Neagle, Editor In Chief from The Tokenist.

With US presidential elections concluded, Bitcoin has been hitting new all-time highs nearly on a weekly basis during November. Having reached almost $100,000 threshold on November 22nd, Bitcoin reinvigorated the altcoin market, now holding a $1.49 trillion market cap.

The common wisdom would suggest that altcoins will follow Bitcoin’s lead, as prior trends have shown. But what types of altcoins should see significant performance? More importantly, are there new fundamentals in play to consider this time?

First, let’s revisit the relationship between Bitcoin and altcoins. It is more important than one would think.

Why Does Bitcoin Lead the Crypto Market?

From the launch of Bitcoin mainnet in January 2009, to Bitcoin price breaching $10k threshold in November 2017, it took nearly 9 years. Although Bitcoin gradually became a household name, it still retained the status of a novel, highly speculative asset. This is understandable in a central banking system, where money is synonymous with government edicts – fiat (by decree) money.

Therefore, belief in government edicts, and government’s application of force, is what gives money its value. This has been the habituated common wisdom for generations. Moreover, there is the question of medium. If Bitcoin is not a physical paper token issued by a central bank, but digital, how can it be trusted?

Blockchain enthusiasts already know the answer. The central bank, the Federal Reserve, also relies on an electronic ledger, which could manifest its accounting as physical tokens (paper money) but not necessarily. In contrast, the entire point of Bitcoin’s ledger is that its accounting is fortified against arbitrary dilution.

That makes Bitcoin pseudo-digital. Its accounting is enforced by computing power via its proof-of-work algorithm, which erects a bridge between the digital and physical. The physical being the energy and hardware assets needed for computing power. Consequently, Bitcoin sets the altcoin market:

As the first cryptocurrency, Bitcoin’s sound money aspect is easy to understand. As the Bitcoin network’s computing power grows, holders are more confident in the inviolability of Bitcoin’s accounting (distributed ledger). As new altcoins appear, they are traded against Bitcoin, it being the market benchmark tethered to physicality of energy and hardware. In times of uncertainty of altcoins’ valuations, holders revert to Bitcoin as a safer asset. Likewise, in times of rising Bitcoin price, holders spill over to small cap altcoins because the profit potential is greater. After all, it is more difficult to move a large market weight that Bitcoin holds.

Inversely, the large Bitcoin market cap serves as a psychological cushion, always ready to absorb fleeing altcoin capital in times of distress. But in a highly stressful landscape, that capital may flee Bitcoin itself.

The problem is, if enough altcoin capital spills over, the entire crypto market goes down because many view Bitcoin as just another cryptocurrency, albeit one that has the first mover advantage.

Altcoin-Bitcoin Pullback

The relationship between the Federal Reserve and the crypto market is intrinsic. When the central bank increased its balance sheet in excess of $6 trillion, between 2020 and 2022, the bloated liquidity spilled over into crypto assets, prompting traders to explore popular trading strategies to maximize opportunities.

Previously, crypto liquidity ballooned during the Initial Coin Offering (ICO) era, having peaked between 2017 and 2018. This era birthed top altcoins at the time; Ethereum (ETH), Cardano (ADA), EOS (EOS), Tezos (XTZ), Stellar (XLM), Algorand (ALGO), NEO (NEO), Filecoin (FIL), Tron (TRX), Chainlink (LINK), and many others.

However, all liquidity is limited. The expansion of the altcoin market ate away Bitcoin’s market cap dominance. Traders often turn to trading rooms during such pivotal shifts to share strategies and insights into navigating market changes effectively.

Although the ICO boom spawned dozens of altcoins, it is also the case that most were fraudulent or dead in the water. Consequently, Bitcoin regained some lost ground until the Fed’s unprecedented monetary intervention during the pandemic narrative.

In March 2022, the Fed started rapidly raising interest rates to curb the inflation it caused, effectively pulling the liquidity rug from the overleveraged crypto market, from Celsius and BlockFi to Terra, Voyager Digital and FTX

After the Fed’s money printing spree, Bitcoin dominance shrank further. Following the over-leveraged Terra (LUNA) collapse, tied to algorithmic stablecoin TerraUSD, the altcoin market suffered an estimated $60 billion loss.

But because top altcoins already performed better than Bitcoin, due to their lower market caps and higher profit potential, the speculative drive remained. This decreased Bitcoin’s dominance further, but only temporarily.

In a classic domino toppling scenario, by the end of 2022, the Fed-pulled liquidity rug ended up triggering the collapse of the over-leveraged FTX exchange, shocking the entire crypto market. Bitcoin was engulfed in the selloff panic, having dropped to its pre-2020 price level of $16.5k.

Nonetheless, as the big question mark loomed over the entire crypto market, Bitcoin started to recover. The US regional banking crisis, in the spring of 2023, helped the case for Bitcoin’s fundamentals. The approval of Bitcoin ETFs in early 2024 and the 4th halving, further laid the groundwork for recent new all-time highs.

But how has the altcoin market evolved alongside Bitcoin?

Memecoin Dominance Is Telling

Most of the “old-guard” altcoins focused on blockchain infrastructure, decentralized finance (DeFi), and other efforts to tokenize human activity via smart contracts. However, the crypto wipeout during 2022 appears to have left psychological scarring.

The lofty narratives of the previous cycle were largely superseded by hype-gambling through memecoins. Artemis data shows that memecoins have dominated the crypto market, with only AI tokens surpassing their performance in early 2024.

By mid-November, memecoins returned 6x the value than the crypto market average.

Altcoins’ performance by categories compared to Bitcoin. Image credit: Artemis.

This coincides with Donald Trump securing his 2nd term in the Oval Office. In turn, this points to crypto holders getting accustomed to social media-driven hype cycles around communities rather than altcoin fundamentals.

Likewise, the AI revolution is still going strong. Other than various “ChatGPT with makeup” software and providers offering hosted GPU servers, AI cryptos are also a hot topic, with the much-awaited release of AI agents expected to spurn another bullish period.

Kaito AI, market insights platform, determined that one in four crypto investors prioritize memecoin discourse. In other words, focus is more on short-term profits rather than long-term return of value. This suits more dynamic traders who look up crypto trends on a daily basis.

Narrative-wise, the following altcoin categories performed ahead of Bitcoin year-to-date: meme, real world assets (RWA), prediction markets, PolitiFi, AI, Solana and smart contract platforms.

Market-cap-weighted category (narrative) performance (%) year-to-date. Image credit: DeFiLlama

In total, there are 15,713 cryptocurrencies in circulation, tracked across 1,178 exchanges and 494 categories. Such an enormous amount of digital assets, across so many categories, creates a daunting mental load to filter the wheat from the chaff.

Conversely, the popularity of memecoins is one manifestation of handling that mental load. After all, their simplicity and virality is itself a filtering mechanism. But another coping manifestation is the reversion to the “old guard” altcoins.

Older Altcoins Return to a Friendlier Scene

The 2022 collapse of crypto prices was so severe that it became pointless to sell altcoins at such toppled prices. Consequently, it is fair to say that many losses were unrealized, awaiting the new bullrun.

It appears that Bitcoin’s latest bullrun is triggering that cycle. At the end of August, Joao Wedson of CryptoQuant observed that the altcoin market is once again aligning with Bitcoin.

Typically, when altcoins outperform Bitcoin, as it happened in January, June and July, this is followed by a market drop. Image credit: CryptoQuant via Joao Wedson

Within the top 20 altcoins (excluding stablecoins) in the previous cycle, during the peak of the November 2021 bullrun, 11 have remained. Although most of their prices are still far away from the prior tops, they have the potential to reclaim ground under the assumption that this is just the start of a new bullrun.

Historical Snapshot (2021 and 2024) – Image credit: CoinMarketCap

This could be the case if more exchange-traded funds (ETFs) are approved, which spurred Bitcoin to rally and gain higher ground earlier in the year. Case in point, NYSE Arca recently filed for Bitwise 10 Crypto Index Fund, including the following coins:

Portfolio Asset Symbol Weight Bitcoin BTC 75.10% Ethereum ETH 16.50% Solana SOL 4.30% XRP XRP 1.50% Cardano ADA 0.70% Avalanche AVAX 0.60% Chainlink LINK 0.40% Bitcoin Cash BCH 0.40% Polkadot DOT 0.30% Uniswap UNI 0.30%

Interestingly, the weight of Bitcoin in the index is much greater than current Bitcoin dominance. Once again, this points to the crypto dilution problem. Despite altcoins being much cheaper, there are so many of them that it is difficult to gauge their fair value long-term.

Likewise, their scarcity is not guaranteed. As more centralized projects, their inflation rate could be a subject of change. For instance, Solana’s current inflation rate of SOL tokens is 4.886% while the long-term proposition is 1.5%.

Nonetheless, now that the anti-crypto SEC Chair is on the way out, while the purportedly crypto-friendly Trump admin is incoming, the crypto market is likely to deepen its liquidity pool. Additionally, the recent verdict that sanction against Tornado Cash was unlawful is likely to have wide reaching implications.

The court effectively acknowledged that dApps are a new type of asset, lacking sanctionable ownership as a smart contract code. To put it differently, the court reinstated common sense that open-source cannot be property.

The Bottom Line

Even with historic money supply boost, liquidity is finite. Bitcoin managed to capture most crypto liquidity, as it pushed an entirely different way of viewing money. This monetary potential spurred countless altcoins into existence, expanding the utility of smart contracts.

But instead of expansion, the crypto market underwent constriction due to massive fraud and over-leverage, pulling down Bitcoin with it. In a cleaner market and more bullish regulatory landscape, Bitcoin is now poised to trigger a new altcoin bullrun.

Amid the daunting altcoin numerosity, 1st gen altcoins resurfaced, attempting to anchor value to established familiarity.

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