How does money flow between Bitcoin, Ethereum and altcoins?

summary

• Since October last year, our Altseason Momentum indicator has shown a growing desire among investors to move capital further up the risk curve.

• While Bitcoin’s dominance remains significant, there are early signs of more capital flowing into the Ethereum, Solana, Polkadot, and Cosmos ecosystems.

• Investigating Uniswap liquidity pools, we can see that the majority of funds are still concentrated in the most mature assets, and while total locked value is moving up the risk curve, trading volume is growing relatively slowly.

Looking forward to the cottage season

The digital asset space may be entering a bull run as new spot Bitcoin ETFs (Exchange Traded Funds) continue to gain momentum. Against this backdrop, we continue to explore the question of whether funds are flowing into altcoins. In this issue, we will focus on the performance of assets further up the risk curve.

Our goal is to assess how money is flowing between altcoin markets. We will again rely on our Altseason indicator as a macro indicator (see WoC-41-2023). This indicator assesses whether positive momentum is building within Total Altcoin Cap and whether there is continued capital inflow into BTC, ETH, and stablecoins.

Our altcoin indicator has been showing positive momentum since October last year, but paused briefly during the sell news event following the launch of the Bitcoin ETF. It was retriggered on February 4th.

In terms of market cap dominance, Bitcoin continues to lead, accounting for more than 52% of the total digital asset market cap. In comparison, ETH accounts for 17%, stablecoins account for 7%, and the rest of the altcoin space accounts for 24%.

In terms of asset performance, BTC and ETH are at the top, with year-to-date gains of +17.6% and +18.2%, respectively. We note that after the Bitcoin ETF was approved, ETH began to show a trend of outperforming BTC, which is in contrast to its relative underperformance in 2023.

Altcoin market capitalization, on the other hand, has not performed in the same manner, with year-to-date growth less than half that of the two major currencies.

Another perspective to track the performance of crypto assets is to use the capped market capitalization of each category, which aggregates the cost basis value of all cryptocurrencies transferred on-chain. From this perspective, we can better assess the flow of funds within the digital asset market:

• Bitcoin is once again the clear leader, with monthly inflows now approaching $20 billion.

• Ethereum inflows tend to lag relative to Bitcoin, suggesting that investors seek confidence and confirmation that the digital asset market is growing. In the 2021 cycle, the peak of new money inflows into Bitcoin occurred 20 days before the peak of new money inflows into Ethereum.

• Altcoins tend to see inflows after Ethereum shows strength , with a duration of 46 days in mid-2021 and 14 days in late 2021.

It is clear that funds have been slower to move downward into altcoins compared to the rotation between the two major cryptocurrencies, a trend that seems to be re-emerging.

Category rotation

As signs of capital flowing into these two major cryptocurrencies emerge, the next question is to observe how capital flows further into other assets on the risk curve over time. In past cycles, several new Layer-1 ecosystems have emerged. Many of these compete with Ethereum, not only in terms of innovation and user appeal, but also in terms of investor capital.

Therefore, we reviewed the top tokens in a few selective ecosystems: Ethereum, Cosmos, Polkadot, and Solana to assess which ones are attracting the most investor interest.

Here, we compare the weekly changes in the total market capitalization of the top tokens in each ecosystem. Over the past 18 months, Solana has shown relatively high volatility, with its positive performance standing out. Polkadot and Cosmos have similar volatility, but the Polkadot ecosystem has outperformed the latter.

Within the Ethereum ecosystem, we can identify three main categories: DeFi, GameFi, and Staking . All three categories have seen inflows since the beginning of the year, but DeFi and GameFi have been seeing relatively large outflows during 2022 and 2023.

GameFi has reversed course this year, seeing significant inflows starting in October, coinciding with the triggering of our altcoin indicator. Conversely, staking tokens have been experiencing consistent positive inflows, albeit smaller in absolute amounts.

Off the risk curve

To determine if investor interest is shifting up the risk curve, and to what extent, we can look to data from Uniswap liquidity pools. Since altcoins tend to be traded by more crypto-native traders through decentralized exchanges, activity on the most established DEXs can serve as a proxy for altcoin trading trends (note: this data reflects Uniswap transactions on the Ethereum mainnet).

Altcoin trading interest was very low during the 2022 bear market, but began to increase in mid-2023, mainly due to the outbreak of "memecoin mania". Altcoin trading currently accounts for nearly 12% of Uniswap trading volume, close to the 17.4% peak seen during the last bull market. In contrast, WBTC and WETH account for 47% of trading, and stablecoins account for 40%.

Uniswap liquidity providers tend to keep a close eye on the market, and changes in the distribution of liquidity between different pools can provide an indication of current market trends. By examining the composition of the total locked value (TVL) on Uniswap, we observed that during the altcoin season, liquidity allocations for tokens outside the top 50 increased. This trend suggests that investors' interest in long-tail tokens is growing.

During the bear market, liquidity was mainly provided to the top 50 tokens as this is where most of the trading volume occurred. The top 10 tokens mainly consisted of WETH, WBTC, and stablecoins.

By observing the percentage change in TVL for each token category, we can see that the liquidity provided by the top 10 (5.14%) and top 20 (10.9%) tokens has increased, while the liquidity of tokens ranked 20 to 50 has decreased. This suggests that the market’s interest in long-tail assets has not yet increased significantly.

We will now examine the pools of the top tokens in each Ethereum classification. This includes assessing the distribution of liquidity across different price ranges and observing the evolution of market depth (similar to the hypothesis we established in WoC 36).

The distribution between altcoins and WETH reserves is balanced, with slightly higher expected upside volatility overall. This suggests that liquidity providers are generally bullish on the prospects of these tokens. The exception is GameFi Token IMX.

When looking at the rate of change in liquidity distribution, we see that market depth has increased in the -5% and +5% range, suggesting that liquidity providers are preparing for a period of heightened price volatility.

UNI is an exception, with market makers increasingly concentrating liquidity close to the current price range. This suggests that price volatility is expected to be smaller for the UNI token, which is not surprising given that it is one of the most mature and established tokens.

Now, if we contrast this with the behavior of traders, we can observe an increase in trading volume on Uniswap since October 2023, including tokens outside the top 10. Trading activity is also increasing for the top 10-20 token pairs.

However, trading activity for the top 20-50 token pairs and token pairs ranked above 50 remained unchanged, which reaffirms our previous hypothesis: while liquidity provision is moving further up the risk curve, trading volume has not yet followed.

in conclusion

As market momentum strengthens with the launch of a new Bitcoin ETF, expectations of a digital asset bull run are beginning to trigger capital flows into altcoins. Our altcoin indicators suggest that the altcoin market could be poised for a more mature and potentially sustained rally, but currently remains relatively concentrated in higher market cap assets.

The digital asset space has changed significantly over the past cycle, with new ecosystems emerging to challenge Ethereum's dominance. Solana has seen the strongest returns over the past year, while Polkadot and Cosmos ecosystems are also beginning to see some movement. Within the Ethereum ecosystem, the staking space has shown the most consistent capital inflows into its top tokens.

The resurgence of altcoin trading on Uniswap, as well as liquidity and volume patterns, highlight a cautious but growing interest in longer-tail assets. This is initially reflected in changes in liquidity provision, and the expectation of heightened volatility. However, this is mainly reflected in the total value locked (TVL) in liquidity pools, and investor trading volume has not yet followed.