Despite the predictions of a number of bullish analysts, bitcoin (BTC) is likely to remain king throughout the course of 2020 and beyond because of BTC’s role as liquidity provider for the crypto market.
Certain analysts are beginning to hail the beginning of a new “altcoin season.” Recent gains by Ethereum, in particular, have been cited as positive news for altcoin enthusiasts.
The problem with this analysis is that the role of bitcoin has morphed significantly since the last altcoin renaissance. Major challenges face even the established cryptocurrencies.
Bitcoin Has Become Digital Gold
Historically there has been a strong correlation between bitcoin and other cryptocurrencies. As bitcoin rose, so did Ethereum, Litecoin, and other altcoins. And as it fell, the wider crypto market fell with it. In 2019 that began to change as the price correlation between bitcoin and altcoins began to fade.
In essence, investors were adopting a “flight to quality” strategy and buying bitcoin to protect themselves from an uncertain crypto market.
This flight was likely triggered by a string of disappointing developments from a number of altcoins in 2019. This means that bitcoin is beginning to take on the same role as gold does in traditional investing: a safe haven in times of trouble.
What About the “Altcoin Season”?
Ignoring the fact that bitcoin is still the biggest fish in the crypto market, it seems like there are positive signs for many altcoins.
Bitcoin is up by 35% over the last 90 days but Ethereum has gained 52%. For less established projects the gains are even larger. Cadano is up by 271% and a number of other lesser altcoins have seen gains of more than 200%.
Despite these gains, altcoins still have a number of fundamental problems. Over 518 crypto and blockchain projects failed in 2019 and altcoins are still vulnerable to pump and dump schemes.
The latest example of this is Dogecoin: a viral TikTok challenge sent the price rising to highs of $0.0052 before it crashed back down to reality.
This kind of volatility makes smaller altcoins very hard to predict but even big projects have their problems. In June, Ethereum (ETH) transaction fees were pushed to a 2 year high by traffic congestion caused by stablecoins.
ETH has also been forced to push back the much-awaited release of Ethereum 2.0. Despite assurances that it will launch in 2020, there is still no specific launch date set. This means that investors may well decide to cash out for fear of a release that will never come.
Another major challenge for altcoin enthusiasts is that bitcoin still dominates more than 62% of the cryptocurrency market. This means that bitcoin still defines the flow of the market as a whole. If investors see that bitcoin is rallying they are likely to shift their assets away from altcoins and into BTC.
Bitcoin Is Likely To Remain King for the Time Being
As long as bitcoin remains the key liquidity provider in the cryptocurrency market, it will remain one of the best performing crypto assets.
This means that any sensible investor is all but forced to make bitcoin the foundation of their portfolio. The next question is whether it’s worth holding altcoins at all.
While a diverse portfolio is always a good thing, for many cryptocurrency investors, holding bitcoin is probably enough, as long as it is balanced by other non-crypto assets. However, for more risk-tolerant investors (And what are crypto investors if not risk-tolerant?) there are opportunities in altcoins.
The key, as with most things in life, is timing. To make the most of altcoins, investors need to understand that bitcoin still drives the market. It is possible to sell an altcoin like Ethereum on the curve but it is very risky, particularly if you do not understand how bitcoin leads the market. The key is to understand bitcoin’s underlying fundamentals and time your altcoin purchases to the flow of the market.
For investors interested in stable long-term gains, bitcoin is the strongest choice. While it has yet to reach the dizzying heights of 2018, the cryptocurrency is still growing faster relative to other financial assets.
The simple fact is that for the foreseeable future, bitcoin is still the best bet for crypto investors.