Price rallies for cryptocurrencies besides bitcoin (BTC) has helped push the digital-asset industry's total market capitalization to about $2 trillion, doubling in just a few months.
Prices for bitcoin have doubled this year, for a market value of $1.1 trillion, but the rally has paused in recent weeks, allowing altcoins to seize the market leadership. Bitcoin’s market dominance, or its share of the overall industry capitalization, has slid to about 57%, from around 73% at the start of the year, according to TradingView.
Ether, the native cryptocurrency of the Ethereum blockchain and the second-biggest overall, recorded an all-time high near $2,100 last week. The digital asset has benefited from speculation that the Ethereum blockchain could see growing use as the network of choice for decentralized finance, or DeFi, consisting of automated, blockchain-based software protocols that might someday replace banks and Wall Street trading firms.
Galen Moore, CoinDesk Research’s director of data and indexes, wrote in an analysis that the outstanding performance during the latest “altcoin season” has come from digital tokens belonging to so-called smart-contract platforms that could compete with Ethereum or complement it.
These alternative blockchains also have benefited from increased usage of stablecoins, which are digital tokens whose value is pegged to real-world currencies, primarily the U.S. dollar.
“I feel like the real value and application of stablecoin, decentralized finance on Tron, and BitTorrent has been identified,” Justin Sun, the founder of the Tron blockchain and CEO of BitTorrent, told CoinDesk via a WeChat message.
Yet, for Ethereum the success has come at a cost: The network's popularity has resulted in congestion, driving up transactional rates known as "gas fees."
“The competition between public blockchains is a good thing,” Tron’s Sun said. “It is true that it is nearly impossible to launch new projects on Ethereum because no one want to use projects that come with hundreds of dollars of mining cost at a slow transaction speed.”
One example of the fast industry growth, according to Denis Vinokourov, head of research at Synergia Capital, is Binance Smart Chain (BSC), a smart-contracts blockchain sponsored by the giant cryptocurrency exchange Binance.
“The narrative is that if you provide innovative products, competitive yields, then one can compete with the old-school establishment” of Ethereum, Vinokourov told CoinDesk. "The key is cheap, fast transactions."
The total transaction volume on Binance Smart Chain in February alone hit more than $700 billion, according to a DappRadar report dated March 11. The unique active wallets on the blockchain increased to 108,000 in February from 30,000 the prior month. Ethereum in February had 67,000 unique active wallets.
“The growth of BSC is generally good for altcoins,” Vinokourov said. It “means you can compete against ether.”
A Binance spokesperson declined CoinDesk’s request to comment on the recent altcoin rally, including Binance’s BNB token.
Early crypto adopters vs. crypto newbies
Unlike bitcoin’s impressive growth since early 2020, much of it driven by institutional investors, the altcoin rally may have been fueled by early crypto adopters and retail investors who are newly arriving to the space.
“As institutional players enter the bitcoin market more and more, they have improved stability, which then begets more stability,” Chad Steinglass, head of trading at CrossTower, said. “While this new dynamic is a welcome development for many investors, it takes away some of the shininess and 'wild wild west' mentality that many early adopter crypto traders crave.”
Similar to retail investors’ interest in so-called “meme stocks” such as GameStop in the traditional stock market, many crypto traders like altcoins with higher volatility and risk than bitcoin – for the “excitement” and increased chances of “seeing multi-bag returns,” Steinglass said.
Arthur Cheong, founder and portfolio manager at DeFi-focused crypto fund DeFiance Capital, added that the renewed interest in altcoins also came from “unsophisticated retail” traders.
Traders who “don’t perform much research are coming back to the market,” Cheong said, citing increased trading volume of altcoins in South Korea, a country that’s primarily dominated by retail crypto investors.
What does the new alt season mean for bitcoin?
Though bitcoin's market dominance has waned, analysts said the growing interest in altcoins will eventually benefit the largest cryptocurrency.
“These early adopters shifting to altcoins will both work to decrease volatility in bitcoin and also eventually help decide the winners from the losers in the alt space, which is kind of a necessary condition for any altcoin to emerge as a viable longer-term asset,” Steinglass said.
Ki Young Ju, CEO of blockchain data provider CryptoQuant, said the heightened capital flows could also migrate back to bitcoin as time goes by.
Bitcoin “will absorb the altcoin market cap sooner or later,” Ju said.
Bitcoin's rally over the past year has been fueled by speculation the oldest and largest cryptocurrency might be useful for investors as a hedge against inflation in the wake of trillions of dollars of coronavirus-related stimulus injected into financial markets by governments and central banks.
In addition to the growing speculation over DeFi, there's been a flurry of interest recently in non-fungible tokens, or NFTs, which represent stakes in unique assets such as art, collectibles, even sneakers.