Alt winds of change? What an altcoin season would mean for crypto

Alt winds of change? What an altcoin season would mean for crypto

A new alt season is here — at least, according to some crypto industry commentators. Over the last month, altcoins — aka cryptocurrencies that aren’t Bitcoin (BTC) — have surged in price, with projects such as Solana, Cardano and Polkadot seeing their tokens triple in value. However, though people are screaming “alt season” with an air of familiarity, the industry is still very much exploring uncharted territory.

The Cointelegraph Markets Pro alt season indicator states that the industry is in the midst of an alt season, showing a 32% inclination. While The Altseason Index, which defines the alt season as a period of 90 days where 75% of the top 50 altcoins outperform Bitcoin, says it isn’t an alt season just yet. But if the last few weeks are anything to go by, the altcoin market is just getting started, and it’s already proving its desire to impress.

One theory behind why an alt season is imminent is that the general sentiment around Bitcoin has reached a solid footing. Outflows from Bitcoin are funding more altcoin projects, resulting in newly launched tokens reporting impressive growth. However, could there be much more to the story than that?

Wen alt season?

Alt seasons can be both good and bad for the crypto economy, being a sort of necessary evil in the space. On the one hand, they are a sign of health, indicating new money flows into the market and causing valuations to surge. However, after a while, speculation tends to outpace the utility of these tokens, causing steep market corrections and immense losses for speculators.

Over the last few years, the cryptocurrency and digital assets space has grown drastically, but according to Hunain Naseer, senior analyst at OKEx Insights, not much is new this time around. “We’re witnessing Ethereum breaking out against BTC and starting to outperform the market leader. The same happened in previous alt seasons,” he said, adding, “ETH is leading a market-wide surge, and as long as it remains strong, the trend can continue till the end of the year.

According to Naseer, the recent altcoin rally is being fuelled by myriad factors, including the recent nonfungible token boom (especially in August), which reaffirmed the market’s belief in the speculative value of digital assets. The recent gust of positive news has also generated renewed market optimism, with announcements for Ethereum’s London hard fork, the launch of smart contracts on Cardano, and cross-chain bridges on Cosmos.

The shift from the more traditional “blue chip” investments in the space like Bitcoin and Ethereum could also reflect the market’s current risk-on sentiment, meaning investors are increasing their risk tolerance due to a more buoyant market outlook. Altcoins are naturally more volatile than Bitcoin owing to their smaller market capitalizations and lower liquidity, but while this means they can quite quickly render investments worthless, they also have the potential for enormous gains.

The stablecoin market capitalization has grown from $36 billion in January to over $115 billion in mid-September, with Tether’s (USDT) supply tripling over the period. Stablecoins, though not exactly altcoins, have become the primary means of value transfer on blockchain networks, and this expansion is a decent representation of decentralized finance’s (DeFi) growing influence on the space.

A well-diversified portfolio can protect investors from risk while ensuring they get in on some of the rallying action. This makes altcoins as a whole rather attractive as an investment class, but all this money has to come from somewhere. With flows into altcoins on the rise, a major BTC sell-off might be in the cards, but institutions seem to be more bullish about Bitcoin than ever before.

According to Rachel Lin, co-founder and CEO of decentralized derivatives exchange SynFutures, Bitcoin isn’t going to crash — it’s just lagging in performance: “I expect the general crypto market to continue to be in the uptrend over the next few months, especially with the Fed remaining dovish and new funds and institutional investors entering the market.”

Neither Bitcoin nor altcoin

One major difference between previous alt seasons and this one is how dominant Ether (ETH) has become. Bitcoin occupied almost 70% of the cryptocurrency market capitalization at the start of the year, while Ether commanded less than 13%. As of Thursday, Ether represents almost 19% of the market, while Bitcoin’s dominance has dropped to below 41%.

DeFi has attracted more institutional investors to the space than anything before it, and this is slowly bringing more legitimacy and awareness to the space. “Even with the many competitors in the space and its network congestion, Ethereum will continue to grow,” said Michael Tzezailidis, director of public relations at Telos — a Web 3.0 blockchain platform — adding, “Developers are literally pouring into the space.”

Many DeFi projects run on the Ethereum network, and while the competition is mounting, it doesn’t appear to be losing steam any time soon. The altcoin market has grown from $220 billion to $1.35 trillion this year alone — some 600% increase in just nine months — with Ethereum playing a significant role. Some don’t even consider ETH an altcoin anymore, and this begs the question: Will other altcoins eventually drop the label as they grow above a certain threshold?

For quite a while now, Bitcoin’s main value proposition has been its utility as a store of value and its deflationary supply, but though BTC is bound to continue receiving attention from investors, the lower market capitalizations of altcoins make for grander short-term returns. Furthermore, it’s more likely that institutional capital will find its way to altcoins with smaller total market capitalization during an alt season.

Ultimately, Ethereum’s move to proof-of-stake (PoS) and protocol updates to deflate its supply could make ETH a genuine contender for the top spot. Investors could be betting on a more gentle inflation curve for ETH and a stronger ecosystem, making it the benchmark asset for other altcoins to follow or compete against.

‘Tis the season?

As people around the globe continue to learn about cryptocurrencies and their ability to solve global issues such as remittances and monetary efficiency, more capital is making its way into the digital assets space. “It’s all about education,” said Cabital CEO and co-founder Raymond Hsu. In recent years, digital assets have broken new ground, and with the smell of an alt season in the air, blockchain could be in for a more focused global approach to how it can better solve real-world issues.

According to Hsu, institutional investors will do what most retail investors do when initially exploring the cryptocurrency world: buy Bitcoin and later move into Ether. He said:

“After they become comfortable, they will begin looking into other projects that are tackling the more intricate challenges.”

Traditional financial institutions that opposed the concept of cryptocurrencies a year ago are now setting up trading desks and offering clients greater exposure to the digital assets space through all kinds of financial instruments. Terms like “Bitcoin” and “blockchain” are slowly becoming household names, and the general rising adoption could mean this alt season could produce more permanent effects.

Though DeFi appears to be thriving primarily on Ethereum, competing projects are setting the stage for the shared, interoperable decentralized framework for financial applications that blockchain will evolve into. While it may take some time for them to start hosting as many decentralized applications as Ethereum or even attain comparable levels of composability, competition almost always benefits consumers. In decentralized systems, everyone is a consumer, and more pressure from competition could accelerate the space’s already rapid growth.

Altcoins have grown immensely over the last two years, and as these projects continue to serve the needs of the blockchain space, either by cracking unsolved problems or improving existing solutions, this trend will likely maintain its trajectory.

The jury is still out on whether an alt season is imminen, but a glance at the markets shows stark similarities with past occurrences, and with the amount of positive news and innovative projects launched on the regular, this season could even run a little longer than expected.

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